filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
To the General Partner and Unitholders of The Blackstone Group L.P.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of The Blackstone Group L.P. and subsidiaries (“Blackstone”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, changes in partners’ capital, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). We also have audited Blackstone’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Blackstone as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Blackstone maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
Blackstone’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on Blackstone’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (“United States”) (“PCAOB”) and are required to be independent with respect to Blackstone in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
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includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 1, 2019
We have served as Blackstone’s auditor since 2006.
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THE BLACKSTONE GROUP L.P.
Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Unit Data)
| December 31, 2018 | December 31, 2017 | |||||||
| Assets | ||||||||
| Cash and Cash Equivalents | $ | 2,207,841 | $ | 1,992,497 | ||||
| Cash Held by Blackstone Funds and Other | 337,320 | 1,929,531 | ||||||
| Investments (including assets pledged of $279,502 and $169,746 at December 31, 2018 and December 31, 2017, respectively) | 20,377,031 | 24,434,049 | ||||||
| Accounts Receivable | 636,238 | 875,018 | ||||||
| Due from Affiliates | 1,994,123 | 2,028,137 | ||||||
| Intangible Assets, Net | 468,507 | 409,828 | ||||||
| Goodwill | 1,869,860 | 1,778,192 | ||||||
| Other Assets | 294,248 | 242,697 | ||||||
| Deferred Tax Assets | 739,482 | 725,970 | ||||||
| Total Assets | $ | 28,924,650 | $ | 34,415,919 | ||||
| Liabilities and Partners’ Capital | ||||||||
| Loans Payable | $ | 9,951,862 | $ | 14,815,436 | ||||
| Due to Affiliates | 1,035,776 | 937,158 | ||||||
| Accrued Compensation and Benefits | 2,942,128 | 2,623,492 | ||||||
| Securities Sold, Not Yet Purchased | 142,617 | 154,380 | ||||||
| Repurchase Agreements | 222,202 | 118,840 | ||||||
| Accounts Payable, Accrued Expenses and Other Liabilities | 875,979 | 2,043,522 | ||||||
| Total Liabilities | 15,170,564 | 20,692,828 | ||||||
| Commitments and Contingencies | ||||||||
| Redeemable Non-Controlling Interests in Consolidated Entities | 141,779 | 210,944 | ||||||
| Partners’ Capital | ||||||||
| The Blackstone Group L.P. Partners’ Capital | ||||||||
| Partners’ Capital (common units: 663,212,830 issued and outstanding as of December 31, 2018; 659,526,093 issued and outstanding as of December 31, 2017) | 6,415,700 | 6,668,511 | ||||||
| Accumulated Other Comprehensive Income | (36,476 | ) | (34,018 | ) | ||||
| Total The Blackstone Group L.P. Partners’ Capital | 6,379,224 | 6,634,493 | ||||||
| Non-Controlling Interests in Consolidated Entities | 3,648,766 | 3,253,148 | ||||||
| Non-Controlling Interests in Blackstone Holdings | 3,584,317 | 3,624,506 | ||||||
| Total Partners’ Capital | 13,612,307 | 13,512,147 | ||||||
| Total Liabilities and Partners’ Capital | $ | 28,924,650 | $ | 34,415,919 | ||||
continued…
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statements of Financial Condition
(Dollars in Thousands)
The following presents the portion of the consolidated balances presented above attributable to consolidated Blackstone Funds which are variable interest entities. The following assets may only be used to settle obligations of these consolidated Blackstone Funds and these liabilities are only the obligations of these consolidated Blackstone Funds and they do not have recourse to the general credit of Blackstone.
| December 31, 2018 | December 31, 2017 | |||||||
| Assets | ||||||||
| Cash Held by Blackstone Funds and Other | $ | 337,030 | $ | 1,580,296 | ||||
| Investments | 8,363,669 | 12,948,653 | ||||||
| Accounts Receivable | 179,863 | 470,156 | ||||||
| Due from Affiliates | 6,303 | 46,112 | ||||||
| Other Assets | 3,880 | 5,189 | ||||||
| Total Assets | $ | 8,890,745 | $ | 15,050,406 | ||||
| Liabilities | ||||||||
| Loans Payable | $ | 6,480,711 | $ | 11,300,621 | ||||
| Due to Affiliates | 129,370 | 86,393 | ||||||
| Securities Sold, Not Yet Purchased | 92,603 | 89,907 | ||||||
| Repurchase Agreements | 222,202 | 118,840 | ||||||
| Accounts Payable, Accrued Expenses and Other Liabilities | 252,176 | 1,562,534 | ||||||
| Total Liabilities | $ | 7,177,062 | $ | 13,158,295 | ||||
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statements of Operations
(Dollars in Thousands, Except Unit and Per Unit Data)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Revenues | ||||||||||||
| Management and Advisory Fees, Net | $ | 3,027,796 | $ | 2,751,322 | $ | 2,464,290 | ||||||
| Incentive Fees | 57,540 | 242,514 | 149,928 | |||||||||
| Investment Income (Loss) | ||||||||||||
| Performance Allocations | ||||||||||||
| Realized | 1,876,507 | 3,571,811 | 1,495,439 | |||||||||
| Unrealized | 561,373 | (105,473 | ) | 530,114 | ||||||||
| Principal Investments | ||||||||||||
| Realized | 415,862 | 635,769 | 278,737 | |||||||||
| Unrealized | 49,917 | 42,605 | 77,314 | |||||||||
| Total Investment Income | 2,903,659 | 4,144,712 | 2,381,604 | |||||||||
| Interest and Dividend Revenue | 171,947 | 139,696 | 95,724 | |||||||||
| Other | 672,317 | (133,229 | ) | 54,753 | ||||||||
| Total Revenues | 6,833,259 | 7,145,015 | 5,146,299 | |||||||||
| Expenses | ||||||||||||
| Compensation and Benefits | ||||||||||||
| Compensation | 1,609,957 | 1,442,485 | 1,335,408 | |||||||||
| Incentive Fee Compensation | 33,916 | 105,279 | 68,921 | |||||||||
| Performance Allocations Compensation | ||||||||||||
| Realized | 711,076 | 1,281,965 | 465,129 | |||||||||
| Unrealized | 319,742 | 103,794 | 333,528 | |||||||||
| Total Compensation and Benefits | 2,674,691 | 2,933,523 | 2,202,986 | |||||||||
| General, Administrative and Other | 594,873 | 488,582 | 541,624 | |||||||||
| Interest Expense | 163,990 | 197,486 | 152,654 | |||||||||
| Fund Expenses | 78,486 | 132,787 | 52,181 | |||||||||
| Total Expenses | 3,512,040 | 3,752,378 | 2,949,445 | |||||||||
| Other Income | ||||||||||||
| Reduction of Tax Receivable Agreement Liability | — | 403,855 | — | |||||||||
| Net Gains from Fund Investment Activities | 191,722 | 321,597 | 184,750 | |||||||||
| Total Other Income | 191,722 | 725,452 | 184,750 | |||||||||
| Income Before Provision for Taxes | 3,512,941 | 4,118,089 | 2,381,604 | |||||||||
| Provision for Taxes | 249,390 | 743,147 | 132,362 | |||||||||
| Net Income | 3,263,551 | 3,374,942 | 2,249,242 | |||||||||
| Net Income (Loss) Attributable to Redeemable Non-Controlling Interests in Consolidated Entities | (2,104 | ) | 13,806 | 3,977 | ||||||||
| Net Income Attributable to Non-Controlling Interests in Consolidated Entities | 358,878 | 497,439 | 246,152 | |||||||||
| Net Income Attributable to Non-Controlling Interests in Blackstone Holdings | 1,364,989 | 1,392,323 | 960,099 | |||||||||
| Net Income Attributable to The Blackstone Group L.P. | $ | 1,541,788 | $ | 1,471,374 | $ | 1,039,014 | ||||||
| Net Income Per Common Unit | ||||||||||||
| Common Units, Basic | $ | 2.27 | $ | 2.21 | $ | 1.60 | ||||||
| Common Units, Diluted | $ | 2.26 | $ | 2.21 | $ | 1.56 | ||||||
| Weighted-Average Common Units Outstanding | ||||||||||||
| Common Units, Basic | 678,850,245 | 665,453,198 | 649,475,264 | |||||||||
| Common Units, Diluted | 1,206,962,846 | 666,246,846 | 1,195,114,590 | |||||||||
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Net Income | $ | 3,263,551 | $ | 3,374,942 | $ | 2,249,242 | ||||||
| Other Comprehensive Income (Loss), Net of Tax — Currency Translation Adjustment | (33,506 | ) | 80,366 | (22,194 | ) | |||||||
| Comprehensive Income | 3,230,045 | 3,455,308 | 2,227,048 | |||||||||
| Less: | ||||||||||||
| Comprehensive Income (Loss) Attributable to Redeemable Non-Controlling Interests in Consolidated Entities | (2,104 | ) | 13,806 | 3,977 | ||||||||
| Comprehensive Income Attributable to Non-Controlling Interests in Consolidated Entities | 356,488 | 548,936 | 234,326 | |||||||||
| Comprehensive Income Attributable to Non-Controlling Interests in Blackstone Holdings | 1,336,331 | 1,392,323 | 960,099 | |||||||||
| Comprehensive Income Attributable to The Blackstone Group L.P. | $ | 1,539,330 | $ | 1,500,243 | $ | 1,028,646 | ||||||
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statement of Changes in Partners’ Capital
(Dollars in Thousands, Except Unit Data)
| The Blackstone Group L.P. | ||||||||||||||||||||||||||||||||
| Common Units | Partners’ Capital | Accumulated Other Compre- hensive (Loss) | Total | Non- Controlling Interests in Consolidated Entities | Non- Controlling Interests in Blackstone Holdings | Total Partners’ Capital | Redeemable Non- Controlling Interests in Consolidated Entities | |||||||||||||||||||||||||
| Balance at December 31, 2015 | 624,450,162 | $ | 6,322,307 | $ | (52,519 | ) | $ | 6,269,788 | $ | 2,408,701 | $ | 3,368,509 | $ | 12,046,998 | $ | 183,459 | ||||||||||||||||
| Adoption of ASC 606 | — | (2,177 | ) | — | (2,177 | ) | — | (4,869 | ) | (7,046 | ) | — | ||||||||||||||||||||
| Net Income | — | 1,039,014 | — | 1,039,014 | 246,152 | 960,099 | 2,245,265 | 3,977 | ||||||||||||||||||||||||
| Currency Translation Adjustment | — | — | (10,368 | ) | (10,368 | ) | (11,826 | ) | — | (22,194 | ) | — | ||||||||||||||||||||
| Capital Contributions | — | — | — | — | 324,630 | — | 324,630 | 15,000 | ||||||||||||||||||||||||
| Capital Distributions | — | (1,068,017 | ) | — | (1,068,017 | ) | (530,415 | ) | (950,652 | ) | (2,549,084 | ) | (17,046 | ) | ||||||||||||||||||
| Transfer of Non-Controlling Interests in Consolidated Entities | — | — | — | — | (8,278 | ) | — | (8,278 | ) | — | ||||||||||||||||||||||
| Deferred Tax Effects Resulting from Acquisition of Ownership Interests from Non-Controlling Interest Holders | — | 5,369 | — | 5,369 | — | — | 5,369 | — | ||||||||||||||||||||||||
| Equity-Based Compensation | — | 166,206 | — | 166,206 | — | 147,848 | 314,054 | — | ||||||||||||||||||||||||
| Net Delivery of Vested Blackstone Holdings Partnership Units and Blackstone Common Units | 6,241,282 | (26,572 | ) | — | (26,572 | ) | — | (1,051 | ) | (27,623 | ) | — | ||||||||||||||||||||
| Change in The Blackstone Group L.P.’s Ownership Interest | — | 7,881 | — | 7,881 | — | (7,881 | ) | — | — | |||||||||||||||||||||||
| Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units | 12,768,098 | 77,520 | — | 77,520 | — | (77,520 | ) | — | — | |||||||||||||||||||||||
| Balance at December 31, 2016 | 643,459,542 | $ | 6,521,531 | $ | (62,887 | ) | $ | 6,458,644 | $ | 2,428,964 | $ | 3,434,483 | $ | 12,322,091 | $ | 185,390 |
continued…
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statement of Changes in Partners’ Capital
(Dollars in Thousands, Except Unit Data)
| The Blackstone Group L.P. | ||||||||||||||||||||||||||||||||
| Common Units | Partners’ Capital | Accumulated Other Compre- hensive (Loss) | Total | Non- Controlling Interests in Consolidated Entities | Non- Controlling Interests in Blackstone Holdings | Total Partners’ Capital | Redeemable Non- Controlling Interests in Consolidated Entities | |||||||||||||||||||||||||
| Balance at December 31, 2016 | 643,459,542 | $ | 6,521,531 | $ | (62,887 | ) | $ | 6,458,644 | $ | 2,428,964 | $ | 3,434,483 | $ | 12,322,091 | $ | 185,390 | ||||||||||||||||
| Consolidation of Fund Entity | — | — | — | — | 387,006 | — | 387,006 | — | ||||||||||||||||||||||||
| Net Income | — | 1,471,374 | — | 1,471,374 | 497,439 | 1,392,323 | 3,361,136 | 13,806 | ||||||||||||||||||||||||
| Currency Translation Adjustment | — | — | 28,869 | 28,869 | 51,497 | — | 80,366 | — | ||||||||||||||||||||||||
| Capital Contributions | — | — | — | — | 730,793 | — | 730,793 | 58,920 | ||||||||||||||||||||||||
| Capital Distributions | — | (1,534,586 | ) | — | (1,534,586 | ) | (836,535 | ) | (1,307,996 | ) | (3,679,117 | ) | (47,172 | ) | ||||||||||||||||||
| Transfer of Non-Controlling Interests in Consolidated Entities | — | — | — | — | (6,016 | ) | — | (6,016 | ) | — | ||||||||||||||||||||||
| Deferred Tax Effects Resulting from Acquisition of Ownership Interests from Non-Controlling Interest Holders | — | 11,057 | — | 11,057 | — | — | 11,057 | — | ||||||||||||||||||||||||
| Equity-Based Compensation | — | 183,484 | — | 183,484 | — | 151,539 | 335,023 | — | ||||||||||||||||||||||||
| Net Delivery of Vested Blackstone Holdings Partnership Units and Blackstone Common Units | 7,084,888 | (28,486 | ) | — | (28,486 | ) | — | (1,706 | ) | (30,192 | ) | — | ||||||||||||||||||||
| Change in The Blackstone Group L.P.’s Ownership Interest | — | (15,197 | ) | — | (15,197 | ) | — | 15,197 | — | — | ||||||||||||||||||||||
| Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units | 8,981,663 | 59,334 | — | 59,334 | — | (59,334 | ) | — | — | |||||||||||||||||||||||
| Balance at December 31, 2017 | 659,526,093 | $ | 6,668,511 | $ | (34,018 | ) | $ | 6,634,493 | $ | 3,253,148 | $ | 3,624,506 | $ | 13,512,147 | $ | 210,944 |
continued…
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statement of Changes in Partners’ Capital
(Dollars in Thousands, Except Unit Data)
| The Blackstone Group L.P. | ||||||||||||||||||||||||||||||||
| Common Units | Partners’ Capital | Accumulated Other Compre- hensive (Loss) | Total | Non- Controlling Interests in Consolidated Entities | Non- Controlling Interests in Blackstone Holdings | Total Partners’ Capital | Redeemable Non- Controlling Interests in Consolidated Entities | |||||||||||||||||||||||||
| Balance at December 31, 2017 | 659,526,093 | $ | 6,668,511 | $ | (34,018 | ) | $ | 6,634,493 | $ | 3,253,148 | $ | 3,624,506 | $ | 13,512,147 | $ | 210,944 | ||||||||||||||||
| Transfer Out Due to Deconsolidation of Fund Entities | — | — | — | — | (197,091 | ) | — | (197,091 | ) | — | ||||||||||||||||||||||
| Net Income | — | 1,541,788 | — | 1,541,788 | 358,878 | 1,364,989 | 3,265,655 | (2,104 | ) | |||||||||||||||||||||||
| Currency Translation Adjustment | — | — | (2,458 | ) | (2,458 | ) | (2,389 | ) | (28,659 | ) | (33,506 | ) | — | |||||||||||||||||||
| Capital Contributions | — | — | — | — | 903,655 | — | 903,655 | 12,980 | ||||||||||||||||||||||||
| Capital Distributions | — | (1,635,921 | ) | — | (1,635,921 | ) | (687,623 | ) | (1,410,483 | ) | (3,734,027 | ) | (78,688 | ) | ||||||||||||||||||
| Transfer or Repurchase of Non-Controlling Interests in Consolidated Entities | — | (7,642 | ) | — | (7,642 | ) | 20,188 | (6,005 | ) | 6,541 | (1,353 | ) | ||||||||||||||||||||
| Deferred Tax Effects Resulting from Acquisition of Ownership Interests from Non-Controlling Interest Holders | — | 13,907 | — | 13,907 | — | — | 13,907 | — | ||||||||||||||||||||||||
| Equity-Based Compensation | — | 204,590 | — | 204,590 | — | 161,824 | 366,414 | — | ||||||||||||||||||||||||
| Net Delivery of Vested Blackstone Holdings Partnership Units and Blackstone Common Units | 4,114,395 | (20,198 | ) | — | (20,198 | ) | — | (5,462 | ) | (25,660 | ) | — | ||||||||||||||||||||
| Repurchase of Blackstone Common Units | (16,000,000 | ) | (541,501 | ) | — | (541,501 | ) | — | — | (541,501 | ) | — | ||||||||||||||||||||
| Change in The Blackstone Group L.P.’s Ownership Interest | — | 66,799 | — | 66,799 | — | (66,799 | ) | — | — | |||||||||||||||||||||||
| Conversion of Blackstone Holdings Partnership Units to Blackstone Common Units | 14,821,603 | 100,397 | — | 100,397 | — | (100,397 | ) | — | — | |||||||||||||||||||||||
| Issuance of Blackstone Common Units and Blackstone Holdings Partnership Units | 750,739 | 24,970 | — | 24,970 | — | 50,803 | 75,773 | — | ||||||||||||||||||||||||
| Balance at December 31, 2018 | 663,212,830 | $ | 6,415,700 | $ | (36,476 | ) | $ | 6,379,224 | $ | 3,648,766 | $ | 3,584,317 | $ | 13,612,307 | $ | 141,779 | ||||||||||||||||
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Operating Activities | ||||||||||||
| Net Income | $ | 3,263,551 | $ | 3,374,942 | $ | 2,249,242 | ||||||
| Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities Blackstone Funds Related | ||||||||||||
| Net Realized Gains on Investments | (2,381,683 | ) | (4,613,531 | ) | (2,023,503 | ) | ||||||
| Changes in Unrealized (Gains) Losses on Investments | 4,784 | (21,589 | ) | (241,617 | ) | |||||||
| Non-Cash Performance Allocations | (561,373 | ) | 105,472 | (304,705 | ) | |||||||
| Non-Cash Performance Allocations and Incentive Fee Compensation | 1,053,690 | 1,491,040 | 867,574 | |||||||||
| Equity-Based Compensation Expense | 366,928 | 338,687 | 323,651 | |||||||||
| Amortization of Intangibles | 59,021 | 46,776 | 82,943 | |||||||||
| Other Non-Cash Amounts Included in Net Income | 45,286 | 363,903 | 17,370 | |||||||||
| Cash Flows Due to Changes in Operating Assets and Liabilities | ||||||||||||
| Cash Acquired with Consolidation of Fund Entity | 31,422 | 13,822 | — | |||||||||
| Cash Relinquished with Deconsolidation of Fund Entities | (899,959 | ) | (33,566 | ) | — | |||||||
| Accounts Receivable | 43,037 | 282,026 | 87,074 | |||||||||
| Reverse Repurchase Agreements | — | 118,495 | 86,398 | |||||||||
| Due from Affiliates | (280,674 | ) | (298,501 | ) | (57,907 | ) | ||||||
| Other Assets | (76,596 | ) | 17,377 | 99,108 | ||||||||
| Accrued Compensation and Benefits | (729,109 | ) | (1,177,852 | ) | (572,814 | ) | ||||||
| Securities Sold, Not Yet Purchased | (10,125 | ) | (62,730 | ) | 42,761 | |||||||
| Accounts Payable, Accrued Expenses and Other Liabilities | (357,582 | ) | (755,232 | ) | (214,723 | ) | ||||||
| Repurchase Agreements | 103,362 | 43,516 | 34,286 | |||||||||
| Due to Affiliates | 74,108 | (9,652 | ) | 39,035 | ||||||||
| Investments Purchased | (13,881,869 | ) | (19,573,153 | ) | (8,798,358 | ) | ||||||
| Cash Proceeds from Sale of Investments | 14,179,523 | 18,723,355 | 8,195,594 | |||||||||
| Net Cash Provided by (Used in) Operating Activities | 45,742 | (1,626,395 | ) | (88,591 | ) | |||||||
| Investing Activities | ||||||||||||
| Purchase of Furniture, Equipment and Leasehold Improvements | (18,377 | ) | (24,347 | ) | (21,826 | ) | ||||||
| Net Cash Paid for Acquisitions, Net of Cash Acquired | (98,219 | ) | (168,913 | ) | — | |||||||
| Net Cash Used in Investing Activities | (116,596 | ) | (193,260 | ) | (21,826 | ) | ||||||
| Financing Activities | ||||||||||||
| Distributions to Non-Controlling Interest | ||||||||||||
| Holders in Consolidated Entities | (762,588 | ) | (813,987 | ) | (533,925 | ) | ||||||
| Contributions from Non-Controlling Interest | ||||||||||||
| Holders in Consolidated Entities | 836,922 | 759,907 | 329,005 | |||||||||
| Payments Under Tax Receivable Agreement | — | (135,831 | ) | (78,985 | ) | |||||||
| Net Settlement of Vested Common Units and Repurchase of Common and Blackstone Holdings Partnership Units | (567,161 | ) | (30,192 | ) | (27,623 | ) | ||||||
| Proceeds from Loans Payable | 3,218,399 | 7,600,153 | 3,321,081 | |||||||||
| Repayment and Repurchase of Loans Payable | (1,009,354 | ) | (1,766,129 | ) | (420,714 | ) | ||||||
| Distributions to Unitholders | (3,046,404 | ) | (2,842,582 | ) | (2,018,669 | ) | ||||||
| Net Cash Provided by (Used in) Financing Activities | (1,330,186 | ) | 2,771,339 | 570,170 | ||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents, Cash Held by Blackstone Funds and Other, and Restricted Cash | 9,712 | 123,850 | (34,059 | ) | ||||||||
continued…
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Cash and Cash Equivalents, Cash Held by Blackstone Funds and Other, and Restricted Cash | ||||||||||||
| Net Increase (Decrease) | $ | (1,391,328 | ) | $ | 1,075,534 | $ | 425,694 | |||||
| Beginning of Period | 3,936,489 | 2,860,955 | 2,435,261 | |||||||||
| End of Period | $ | 2,545,161 | $ | 3,936,489 | $ | 2,860,955 | ||||||
| Supplemental Disclosure of Cash Flows Information | ||||||||||||
| Payments for Interest | $ | 169,872 | $ | 160,178 | $ | 151,948 | ||||||
| Payments for Income Taxes | $ | 192,790 | $ | 106,032 | $ | 65,790 | ||||||
| Supplemental Disclosure of Non-Cash Investing and Financing Activities | ||||||||||||
| Non-Cash Contributions from Non-Controlling Interest Holders | $ | 10,435 | $ | 1,112 | $ | 1,155 | ||||||
| Non-Cash Distributions to Non-Controlling Interest Holders | $ | (18,723 | ) | $ | (69,721 | ) | $ | (13,536 | ) | |||
| Non-Cash Consideration for Acquisition | $ | (50,803 | ) | $ | (95,262 | ) | $ | — | ||||
| Net Assets Related to the Consolidation of Certain Fund Entities | $ | — | $ | 387,006 | $ | — | ||||||
| Notes Issuance Costs | $ | — | $ | 5,582 | $ | 5,491 | ||||||
| Transfer of Interests to Non-Controlling Interest Holders | $ | 20,188 | $ | (6,016 | ) | $ | (8,278 | ) | ||||
| Change in The Blackstone Group L.P.’s Ownership Interest | $ | 66,799 | $ | (15,197 | ) | $ | 7,881 | |||||
| Net Settlement of Vested Common Units | $ | 136,238 | $ | 127,392 | $ | 101,898 | ||||||
| Conversion of Blackstone Holdings Units to Common Units | $ | 100,397 | $ | 59,334 | $ | 77,520 | ||||||
| Acquisition of Ownership Interests from Non-Controlling Interest Holders Deferred Tax Asset | $ | (93,391 | ) | $ | (74,487 | ) | $ | (59,304 | ) | |||
| Due to Affiliates | $ | 79,484 | $ | 63,430 | $ | 53,935 | ||||||
| Partners’ Capital | $ | 13,907 | $ | 11,057 | $ | 5,369 | ||||||
| Issuance of New Units | $ | 24,970 | $ | — | $ | — | ||||||
The following table provides a reconciliation of Cash and Cash Equivalents, Cash Held by Blackstone Funds and Other, and Restricted Cash reported within the Consolidated Statements of Financial Condition:
| December 31, 2018 | December 31, 2017 | |||||||
| Cash and Cash Equivalents | $ | 2,207,841 | $ | 1,992,497 | ||||
| Cash Held by Blackstone Funds and Other | 337,320 | 1,929,531 | ||||||
| Restricted Cash included in Other Assets | — | 14,461 | ||||||
| $ | 2,545,161 | $ | 3,936,489 | |||||
See notes to consolidated financial statements.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| 1. | ORGANIZATION |
|---|
The Blackstone Group L.P., together with its subsidiaries (“Blackstone” or the “Partnership”), is a leading global manager of private capital. The alternative asset management business includes the management of private equity funds, real estate funds, real estate investment trusts (“REITs”), funds of hedge funds, hedge funds, credit-focused funds, collateralized loan obligation (“CLO”) vehicles, separately managed accounts and registered investment companies (collectively referred to as the “Blackstone Funds”). Blackstone’s business is organized into four segments: Real Estate, Private Equity, Hedge Fund Solutions and Credit.
The Partnership was formed as a Delaware limited partnership on March 12, 2007. The Partnership is managed and operated by its general partner, Blackstone Group Management L.L.C., which is in turn wholly owned by Blackstone’s senior managing directors and controlled by one of Blackstone’s founders, Stephen A. Schwarzman (the “Founder”). The activities of the Partnership are conducted through its holding partnerships: Blackstone Holdings I L.P., Blackstone Holdings AI L.P., Blackstone Holdings II L.P., Blackstone Holdings III L.P. and Blackstone Holdings IV L.P. (collectively, “Blackstone Holdings”, “Blackstone Holdings Partnerships” or the “Holding Partnerships”). The Partnership, through its wholly owned subsidiaries, is the sole general partner in each of these Holding Partnerships.
Generally, holders of the limited partner interests in the Holding Partnerships may, four times each year, exchange their limited partnership interests (“Partnership Units”) for Blackstone common units, on a one-to-one basis, exchanging one Partnership Unit from each of the Holding Partnerships for one Blackstone common unit.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Basis of Presentation
The accompanying consolidated financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The consolidated financial statements include the accounts of the Partnership, its wholly owned or majority-owned subsidiaries, the consolidated entities which are considered to be variable interest entities and for which the Partnership is considered the primary beneficiary, and certain partnerships or similar entities which are not considered variable interest entities but in which the general partner is presumed to have control.
All intercompany balances and transactions have been eliminated in consolidation.
Restructurings within consolidated CLOs are treated as investment purchases or sales, as applicable, in the Consolidated Statements of Cash Flows.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that estimates utilized in the preparation of the consolidated financial statements are prudent and reasonable. Such estimates include those used in the valuation of investments and financial instruments and the accounting for Goodwill and equity-based compensation. Actual results could differ from those estimates and such differences could be material.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Consolidation
The Partnership consolidates all entities that it controls through a majority voting interest or otherwise, including those Blackstone Funds in which the general partner has a controlling financial interest. The Partnership has a controlling financial interest in Blackstone Holdings because the limited partners do not have the right to dissolve the partnerships or have substantive kick out rights or participating rights that would overcome the control held by the Partnership. Accordingly, the Partnership consolidates Blackstone Holdings and records non-controlling interests to reflect the economic interests of the limited partners of Blackstone Holdings.
In addition, the Partnership consolidates all variable interest entities (“VIE”) in which it is the primary beneficiary. An enterprise is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The consolidation guidance requires an analysis to determine (a) whether an entity in which the Partnership holds a variable interest is a VIE and (b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests, would give it a controlling financial interest. Performance of that analysis requires the exercise of judgment.
The Partnership determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and continuously reconsiders that conclusion. In determining whether the Partnership is the primary beneficiary, Blackstone evaluates its control rights as well as economic interests in the entity held either directly or indirectly by the Partnership. The consolidation analysis can generally be performed qualitatively; however, if it is not readily apparent that the Partnership is not the primary beneficiary, a quantitative analysis may also be performed. Investments and redemptions (either by the Partnership, affiliates of the Partnership or third parties) or amendments to the governing documents of the respective Blackstone Funds could affect an entity’s status as a VIE or the determination of the primary beneficiary. At each reporting date, the Partnership assesses whether it is the primary beneficiary and will consolidate or deconsolidate accordingly.
Assets of consolidated VIEs that can only be used to settle obligations of the consolidated VIE and liabilities of a consolidated VIE for which creditors (or beneficial interest holders) do not have recourse to the general credit of Blackstone are presented in a separate section in the Consolidated Statements of Financial Condition.
Blackstone’s other disclosures regarding VIEs are discussed in Note 9. “Variable Interest Entities”.
Revenue Recognition
Revenues primarily consist of management and advisory fees, incentive fees, investment income, interest and dividend revenue and other.
Management and advisory fees and incentive fees are accounted for as contracts with customers. Under the guidance for contracts with customers, an entity is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, an entity may include variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved. See Note 19. “Segment Reporting” for a disaggregated presentation of revenues from contracts with customers.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Investment Income represents the unrealized and realized gains and losses on the Partnership’s Performance Allocations and Principal Investments. Interest and Dividend Revenue comprises primarily interest and dividend income earned on principal investments held by the Partnership. Other Revenue consists of miscellaneous income and foreign exchange gains and losses arising on transactions denominated in currencies other than U.S. dollars.
Management and Advisory Fees, Net — Management and Advisory Fees, Net are comprised of management fees, including base management fees, transaction and other fees and advisory fees net of management fee reductions and offsets.
The Partnership earns base management fees from limited partners of funds in each of its managed funds, at a fixed percentage of assets under management, net asset value, total assets, committed capital or invested capital. These customer contracts require the Partnership to provide investment management services, which represents a performance obligation that the Partnership satisfies over time. Management fees are a form of variable consideration because the fees the Partnership is entitled to vary based on fluctuations in the basis for the management fee. The amount recorded as revenue is generally determined at the end of the period because these management fees are payable on a regular basis (typically quarterly) and are not subject to clawback once paid.
Transaction, advisory and other fees (including monitoring fees) are principally fees charged to the limited partners of funds indirectly through the managed funds and portfolio companies. The investment advisory agreements generally require that the investment adviser reduce the amount of management fees payable by the limited partners to the Partnership (“management fee reductions”) by an amount equal to a portion of the transaction and other fees paid to the Partnership by the portfolio companies. The amount of the reduction varies by fund, the type of fee paid by the portfolio company and the previously incurred expenses of the fund. These fees and associated management fee reductions are a component of the transaction price for the Partnership’s performance obligation to provide investment management services to the limited partners of funds and are recognized as changes to the transaction price in the period in which they are charged and the services are performed.
Management fee offsets are reductions to management fees payable by the limited partners of the Blackstone Funds, which are based on the amount such limited partners reimburse the Blackstone Funds or the Partnership primarily for placement fees. Providing investment management services requires the Partnership to arrange for services on behalf of its customers. In those situations where the Partnership is acting as an agent on behalf of the limited partners of funds, it presents the cost of services as net against management fee revenue. In all other situations, the Partnership is primarily responsible for fulfilling the services and is therefore acting as a principal for those arrangements. As a result, the cost of those services is presented gross as Compensation or General, Administrative and Other expense, as appropriate, with any reimbursement from the limited partners of the funds recorded as Management and Advisory Fees, Net.
Accrued but unpaid Management and Advisory Fees, net of management fee reductions and management fee offsets, as of the reporting date are included in Accounts Receivable or Due from Affiliates in the Consolidated Statements of Financial Condition.
Incentive Fees — Contractual fees earned based on the performance of Blackstone Funds (“Incentive Fees”) are a form of variable consideration in Blackstone’s contracts with customers to provide investment management services. Incentive Fees are earned based on fund performance during the period, subject to the achievement of minimum return levels, or high water marks, in accordance with the respective terms set out in each fund’s governing agreements. Incentive Fees will not be recognized as revenue until (a) it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, or (b) the uncertainty associated with the
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
variable consideration is subsequently resolved. Incentive Fees are typically recognized as revenue when realized at the end of the measurement period. Once realized, such fees are not subject to clawback or reversal. Accrued but unpaid Incentive Fees charged directly to investors in Blackstone Funds as of the reporting date are recorded within Due from Affiliates in the Consolidated Statements of Financial Condition.
Investment Income (Loss) — Investment Income (Loss) represents the unrealized and realized gains and losses on the Partnership’s Performance Allocations and Principal Investments.
In certain fund structures across private equity, real estate, hedge fund solutions and credit-focused funds (“carry funds”), Blackstone, through its subsidiaries, invests alongside its limited partners in a partnership and is entitled to its pro-rata share of the results of the fund (a “pro-rata allocation”). In addition to a pro-rata allocation, and assuming certain investment returns are achieved, Blackstone is entitled to a disproportionate allocation of the income otherwise allocable to the limited partners, commonly referred to as carried interest (“Performance Allocations”).
Performance Allocations are made to the general partner based on cumulative fund performance to date, subject to a preferred return to limited partners. At the end of each reporting period, the Partnership calculates the balance of accrued Performance Allocations (“Accrued Performance Allocations”) that would be due to the Partnership for each fund, pursuant to the fund agreements, as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as Accrued Performance Allocations to reflect either (a) positive performance resulting in an increase in the Accrued Performance Allocation to the general partner or (b) negative performance that would cause the amount due to the Partnership to be less than the amount previously recognized as revenue, resulting in a negative adjustment to the Accrued Performance Allocation to the general partner. In each scenario, it is necessary to calculate the Accrued Performance Allocation on cumulative results compared to the Accrued Performance Allocation recorded to date and make the required positive or negative adjustments. The Partnership ceases to record negative Performance Allocations once previously Accrued Performance Allocations for such fund have been fully reversed. The Partnership is not obligated to pay guaranteed returns or hurdles, and therefore, cannot have negative Performance Allocations over the life of a fund. Accrued Performance Allocations as of the reporting date are reflected in Investments in the Consolidated Statements of Financial Condition.
Performance Allocations are realized when an underlying investment is profitably disposed of and the fund’s cumulative returns are in excess of the preferred return or, in limited instances, after certain thresholds for return of capital are met. Performance Allocations are subject to clawback to the extent that the Performance Allocation received to date exceeds the amount due to Blackstone based on cumulative results. As such, the accrual for potential repayment of previously received Performance Allocations, which is a component of Due to Affiliates, represents all amounts previously distributed to Blackstone Holdings and non-controlling interest holders that would need to be repaid to the Blackstone carry funds if the Blackstone carry funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date. The actual clawback liability, however, generally does not become realized until the end of a fund’s life except for certain funds, including certain Blackstone real estate funds, multi-asset class investment funds and credit-focused funds, which may have an interim clawback liability.
Principal Investments include the unrealized and realized gains and losses on the Partnership’s principal investments, including its investments in Blackstone Funds that are not consolidated and receive pro-rata allocations, its equity method investments, and other principal investments. Income (Loss) on Principal Investments
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
is realized when the Partnership redeems all or a portion of its investment or when the Partnership receives cash income, such as dividends or distributions. Unrealized Income (Loss) on Principal Investments results from changes in the fair value of the underlying investment as well as the reversal of unrealized gain (loss) at the time an investment is realized.
Interest and Dividend Revenue — Interest and Dividend Revenue comprises primarily interest and dividend income earned on principal investments not accounted for under the equity method held by Blackstone.
Other Revenue — Other Revenue consists of miscellaneous income and foreign exchange gains and losses arising on transactions denominated in currencies other than U.S. dollars.
Fair Value of Financial Instruments
GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values, as follows:
| • | Level I — Quoted prices are available in active markets for identical financial instruments as of the reporting date. The types of financial instruments in Level I include listed equities, listed derivatives and mutual funds with quoted prices. The Partnership does not adjust the quoted price for these investments, even in situations where Blackstone holds a large position and a sale could reasonably impact the quoted price. |
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| • | Level II — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Financial instruments which are generally included in this category include corporate bonds and loans, including corporate bonds and loans held within CLO vehicles, government and agency securities, less liquid and restricted equity securities, and certain over-the-counter derivatives where the fair value is based on observable inputs. Senior and subordinated notes issued by CLO vehicles are classified within Level II of the fair value hierarchy. |
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| • | Level III — Pricing inputs are unobservable for the financial instruments and includes situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category generally include general and limited partnership interests in private equity and real estate funds, credit-focused funds, distressed debt and non-investment grade residual interests in securitizations, certain corporate bonds and loans held within CLO vehicles, and certain over-the-counter derivatives where the fair value is based on unobservable inputs. |
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In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Level II Valuation Techniques
Financial instruments classified within Level II of the fair value hierarchy comprise debt instruments, including certain corporate loans and bonds held by Blackstone’s consolidated CLO vehicles and debt securities sold, not yet purchased. Certain equity securities and derivative instruments valued using observable inputs are also classified as Level II.
The valuation techniques used to value financial instruments classified within Level II of the fair value hierarchy are as follows:
| • | Debt Instruments and Equity Securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices and market transactions in comparable investments and various relationships between investments. The valuation of certain equity securities is based on an observable price for an identical security adjusted for the effect of a restriction. |
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| • | Freestanding Derivatives are valued using contractual cash flows and observable inputs comprising yield curves, foreign currency rates and credit spreads. |
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| • | Senior and subordinate notes issued by CLO vehicles are classified based on the more observable fair value of CLO assets less (a) the fair value of any beneficial interests held by Blackstone, and (b) the carrying value of any beneficial interests that represent compensation for services. |
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Level III Valuation Techniques
In the absence of observable market prices, Blackstone values its investments using valuation methodologies applied on a consistent basis. For some investments little market activity may exist; management’s determination of fair value is then based on the best information available in the circumstances, and may incorporate management’s own assumptions and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks. Investments for which market prices are not observable include private investments in the equity of operating companies, real estate properties, certain funds of hedge funds and credit-focused investments.
Private Equity Investments — The fair values of private equity investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, public market or private transactions, valuations for comparable companies and other measures which, in many cases, are based on unaudited information at the time received. Valuations may be derived by reference to observable valuation measures for comparable companies or transactions (for example, multiplying a key performance metric of the investee company such as EBITDA by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Where a discounted cash flow method is used, a terminal value is derived by reference to EBITDA or price/earnings exit multiples.
Real Estate Investments — The fair values of real estate investments are determined by considering projected operating cash flows, sales of comparable assets, if any, and replacement costs among other measures. The methods used to estimate the fair value of real estate investments include the discounted cash flow method and/or capitalization rates (“cap rates”) analysis. Valuations may be derived by reference to observable valuation measures
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
for comparable companies or assets (for example, multiplying a key performance metric of the investee company or asset, such as EBITDA, by a relevant valuation multiple observed in the range of comparable companies or transactions), adjusted by management for differences between the investment and the referenced comparables, and in some instances by reference to option pricing models or other similar methods. Where a discounted cash flow method is used, a terminal value is derived by reference to an exit EBITDA multiple or capitalization rate. Additionally, where applicable, projected distributable cash flow through debt maturity will be considered in support of the investment’s fair value.
Credit-Focused Investments — The fair values of credit-focused investments are generally determined on the basis of prices between market participants provided by reputable dealers or pricing services. For credit-focused investments that are not publicly traded or whose market prices are not readily available, Blackstone may utilize other valuation techniques, including the discounted cash flow method or a market approach. The discounted cash flow method projects the expected cash flows of the debt instrument based on contractual terms, and discounts such cash flows back to the valuation date using a market-based yield. The market-based yield is estimated using yields of publicly traded debt instruments issued by companies operating in similar industries as the subject investment, with similar leverage statistics and time to maturity.
The market approach is generally used to determine the enterprise value of the issuer of a credit investment, and considers valuation multiples of comparable companies or transactions. The resulting enterprise value will dictate whether or not such credit investment has adequate enterprise value coverage. In cases of distressed credit instruments, the market approach may be used to estimate a recovery value in the event of a restructuring.
Investments, at Fair Value
The Blackstone Funds are accounted for as investment companies under the American Institute of Certified Public Accountants Accounting and Auditing Guide, Investment Companies, and in accordance with the GAAP guidance on investment companies and reflect their investments, including majority-owned and controlled investments (the “Portfolio Companies”), at fair value. Such consolidated funds’ investments are reflected in Investments on the Consolidated Statements of Financial Condition at fair value, with unrealized gains and losses resulting from changes in fair value reflected as a component of Net Gains from Fund Investment Activities in the Consolidated Statements of Operations. Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date, at current market conditions (i.e., the exit price).
Blackstone’s principal investments are presented at fair value with unrealized appreciation or depreciation and realized gains and losses recognized in the Consolidated Statements of Operations within Investment Income (Loss).
For certain instruments, the Partnership has elected the fair value option. Such election is irrevocable and is applied on an investment by investment basis at initial recognition. The Partnership has applied the fair value option for certain loans and receivables and certain investments in private debt securities that otherwise would not have been carried at fair value with gains and losses recorded in net income. The methodology for measuring the fair value of such investments is consistent with the methodology applied to private equity, real estate, credit-focused and funds of hedge funds investments. Changes in the fair value of such instruments are recognized in Investment Income (Loss) in the Consolidated Statements of Operations. Interest income on interest bearing loans and receivables and debt securities on which the fair value option has been elected is based on stated coupon rates adjusted for the accretion of purchase discounts and the amortization of purchase premiums. This interest income is recorded within Interest and Dividend Revenue.
The Partnership has elected the fair value option for the assets of consolidated CLO vehicles. As permitted under GAAP, the Partnership measures the liabilities of consolidated CLO vehicles as (a) the sum of the fair value
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
of the consolidated CLO assets and the carrying value of any non-financial assets held temporarily, less (b) the sum of the fair value of any beneficial interests retained by the Partnership (other than those that represent compensation for services) and the Partnership’s carrying value of any beneficial interests that represent compensation for services. As a result of this measurement alternative, there is no attribution of amounts to Non-Controlling Interests for consolidated CLO vehicles. Assets of the consolidated CLOs are presented within Investments within the Consolidated Statements of Financial Condition and Liabilities within Loans Payable for the amounts due to unaffiliated third parties and Due to Affiliates for the amounts held by non-consolidated affiliates. Changes in the fair value of consolidated CLO assets and liabilities and related interest, dividend and other income are presented within Net Gains from Fund Investment Activities. Expenses of consolidated CLO vehicles are presented in Fund Expenses.
The Partnership has elected the fair value option for certain proprietary investments that would otherwise have been accounted for using the equity method of accounting. The fair value of such investments is based on quoted prices in an active market or using the discounted cash flow method. Changes in fair value are recognized in Investment Income (Loss) in the Consolidated Statements of Operations.
Further disclosure on instruments for which the fair value option has been elected is presented in Note 7. “Fair Value Option”.
The investments of consolidated Blackstone Funds in funds of hedge funds (“Investee Funds”) are valued at net asset value (“NAV”) per share of the Investee Fund. In limited circumstances, the Partnership may determine, based on its own due diligence and investment procedures, that NAV per share does not represent fair value. In such circumstances, the Partnership will estimate the fair value in good faith and in a manner that it reasonably chooses, in accordance with the requirements of GAAP.
Certain investments of Blackstone and of the consolidated Blackstone funds of hedge funds and credit-focused funds measure their investments in underlying funds at fair value using NAV per share without adjustment. The terms of the investee’s investment generally provide for minimum holding periods or lock-ups, the institution of gates on redemptions or the suspension of redemptions or an ability to side pocket investments, at the discretion of the investee’s fund manager, and as a result, investments may not be redeemable at, or within three months of, the reporting date. A side pocket is used by hedge funds and funds of hedge funds to separate investments that may lack a readily ascertainable value, are illiquid or are subject to liquidity restriction. Redemptions are generally not permitted until the investments within a side pocket are liquidated or it is deemed that the conditions existing at the time that required the investment to be included in the side pocket no longer exist. As the timing of either of these events is uncertain, the timing at which the Partnership may redeem an investment held in a side pocket cannot be estimated. Further disclosure on instruments for which fair value is measured using NAV per share is presented in Note 5. “Net Asset Value as Fair Value”.
Security and loan transactions are recorded on a trade date basis.
Equity Method Investments
Investments in which the Partnership is deemed to exert significant influence, but not control, are accounted for using the equity method of accounting except in cases where the fair value option has been elected. The Partnership has significant influence over all Blackstone Funds in which it invests but does not consolidate. Therefore, its investments in such Blackstone Funds, which include both a proportionate and disproportionate allocation of the profits and losses (as is the case with carry funds that include a Performance Allocation), are accounted for under the equity method. Under the equity method of accounting, the Partnership’s share of earnings (losses) from equity method investments is included in Investment Income (Loss) in the Consolidated Statements of Operations.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
In cases where the Partnership’s equity method investments provide for a disproportionate allocation of the profits and losses (as is the case with carry funds that include a Performance Allocation), the Partnership’s share of earnings (losses) from equity method investments is determined using a balance sheet approach referred to as the hypothetical liquidation at book value (“HLBV”) method. Under the HLBV method, at the end of each reporting period the Partnership calculates the Accrued Performance Allocations that would be due to the Partnership for each fund pursuant to the fund agreements as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as Accrued Performance Allocations to reflect either (a) positive performance resulting in an increase in the Accrued Performance Allocation to the general partner, or (b) negative performance that would cause the amount due to the Partnership to be less than the amount previously recognized as revenue, resulting in a negative adjustment to the Accrued Performance Allocation to the general partner. In each scenario, it is necessary to calculate the Accrued Performance Allocation on cumulative results compared to the Accrued Performance Allocation recorded to date and make the required positive or negative adjustments. The Partnership ceases to record negative Performance Allocations once previously Accrued Performance Allocations for such fund have been fully reversed. The Partnership is not obligated to pay guaranteed returns or hurdles, and therefore, cannot have negative Performance Allocations over the life of a fund. The carrying amounts of equity method investments are reflected in Investments in the Consolidated Statements of Financial Condition.
Cash and Cash Equivalents
Cash and Cash Equivalents represents cash on hand, cash held in banks, money market funds and liquid investments with original maturities of three months or less. Interest income from cash and cash equivalents is recorded in Interest and Dividend Revenue in the Consolidated Statements of Operations.
Cash Held by Blackstone Funds and Other
Cash Held by Blackstone Funds and Other represents cash and cash equivalents held by consolidated Blackstone Funds and other consolidated entities. Such amounts are not available to fund the general liquidity needs of Blackstone.
Accounts Receivable
Accounts Receivable includes management fees receivable from limited partners, receivables from underlying funds in the fund of hedge funds business, placement and advisory fees receivables, receivables relating to unsettled sale transactions and loans extended to unaffiliated third parties. Accounts Receivable, excluding those for which the fair value option has been elected, are assessed periodically for collectability. Amounts determined to be uncollectible are charged directly to General, Administrative and Other Expenses in the Consolidated Statements of Operations.
Intangibles and Goodwill
Blackstone’s intangible assets consist of contractual rights to earn future fee income, including management and advisory fees, Incentive Fees and Performance Allocations. Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from three to twenty years, reflecting the contractual lives of such assets. Amortization expense is included within General, Administrative and Other in the Consolidated Statements of Operations. The Partnership does not hold any indefinite-lived intangible assets. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Goodwill comprises goodwill arising from the contribution and reorganization of the Partnership’s predecessor entities in 2007 immediately prior to its IPO and the acquisitions of GSO in 2008, Strategic Partners in 2013, Harvest Fund Advisors LLC (“Harvest”) in 2017 and Clarus Ventures LLC (“Clarus”) in 2018. Goodwill is reviewed for impairment at least annually utilizing a qualitative or quantitative approach, and more frequently if circumstances indicate impairment may have occurred. The impairment testing for goodwill under the qualitative approach is based first on a qualitative assessment to determine if it is more likely than not that the fair value of Blackstone’s operating segments is less than their respective carrying values. The operating segment is the reporting level for testing the impairment of goodwill. If it is determined that it is more likely than not that an operating segment’s fair value is less than its carrying value or when the quantitative approach is used, a two-step quantitative assessment is performed to (a) calculate the fair value of the operating segment and compare it to its carrying value, and (b) if the carrying value exceeds its fair value, to measure an impairment loss.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements consist primarily of leasehold improvements, furniture, fixtures and equipment, computer hardware and software and are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets’ estimated useful economic lives, which for leasehold improvements are the lesser of the lease terms or the life of the asset, generally ten to fifteen years, and three to seven years for other fixed assets. The Partnership evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Foreign Currency
In the normal course of business, the Partnership may enter into transactions not denominated in United States dollars. Foreign exchange gains and losses arising on such transactions are recorded as Other Revenue in the Consolidated Statements of Operations. Foreign currency transaction gains and losses arising within consolidated Blackstone Funds are recorded in Net Gains (Losses) from Fund Investment Activities. In addition, the Partnership consolidates a number of entities that have a non-U.S. dollar functional currency. Non-U.S. dollar denominated assets and liabilities are translated to U.S. dollars at the exchange rate prevailing at the reporting date and income, expenses, gains and losses are translated at the prevailing exchange rate on the dates that they were recorded. Cumulative translation adjustments arising from the translation of non-U.S. dollar denominated operations are recorded in Other Comprehensive Income and allocated to Non-Controlling Interests in Consolidated Entities and Non-Controlling Interests in Blackstone Holdings, as applicable.
Comprehensive Income
Comprehensive Income consists of Net Income and Other Comprehensive Income. The Partnership’s Other Comprehensive Income is comprised of foreign currency cumulative translation adjustments.
Non-Controlling Interests in Consolidated Entities
Non-Controlling Interests in Consolidated Entities represent the component of Partners’ Capital in consolidated Blackstone Funds held by third party investors and employees. The percentage interests held by third parties and employees is adjusted for general partner allocations and by subscriptions and redemptions in funds of hedge funds and certain credit-focused funds which occur during the reporting period. In addition, all non-controlling interests in consolidated Blackstone Funds are attributed a share of income (loss) arising from the respective funds and a share
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
of other comprehensive income, if applicable. Income (Loss) is allocated to non-controlling interests in consolidated entities based on the relative ownership interests of third party investors and employees after considering any contractual arrangements that govern the allocation of income (loss) such as fees allocable to The Blackstone Group L.P.
Redeemable Non-Controlling Interests in Consolidated Entities
Non-controlling interests related to funds of hedge funds are subject to annual, semi-annual or quarterly redemption by investors in these funds following the expiration of a specified period of time, or may be withdrawn subject to a redemption fee during the period when capital may not be withdrawn. As limited partners in these types of funds have been granted redemption rights, amounts relating to third party interests in such consolidated funds are presented as Redeemable Non-Controlling Interests in Consolidated Entities within the Consolidated Statements of Financial Condition. When redeemable amounts become legally payable to investors, they are classified as a liability and included in Accounts Payable, Accrued Expenses and Other Liabilities in the Consolidated Statements of Financial Condition. For all consolidated funds in which redemption rights have not been granted, non-controlling interests are presented within Partners’ Capital in the Consolidated Statements of Financial Condition as Non-Controlling Interests in Consolidated Entities.
Non-Controlling Interests in Blackstone Holdings
Non-Controlling Interests in Blackstone Holdings represent the component of Partners’ Capital in the consolidated Blackstone Holdings Partnerships held by Blackstone personnel and others who are limited partners of the Blackstone Holdings Partnerships.
Certain costs and expenses are borne directly by the Holdings Partnerships. Income (Loss), excluding those costs directly borne by and attributable to the Holdings Partnerships, is attributable to Non-Controlling Interests in Blackstone Holdings. This residual attribution is based on the year to date average percentage of Blackstone Holdings Partnership Units held by Blackstone personnel and others who are limited partners of the Blackstone Holdings Partnerships.
Compensation and Benefits
Compensation and Benefits — Compensation — Compensation consists of (a) salary and bonus, and benefits paid and payable to employees and senior managing directors and (b) equity-based compensation associated with the grants of equity-based awards to employees and senior managing directors. Compensation cost relating to the issuance of equity-based awards to senior managing directors and employees is measured at fair value at the grant date, and expensed over the vesting period on a straight-line basis, taking into consideration expected forfeitures, except in the case of (a) equity-based awards that do not require future service, which are expensed immediately, and (b) certain awards to recipients that meet criteria making them eligible for retirement (allowing such recipient to keep a percentage of those awards upon departure from Blackstone after becoming eligible for retirement), for which the expense for the portion of the award that would be retained in the event of retirement is either expensed immediately or amortized to the retirement date. Cash settled equity-based awards are classified as liabilities and are remeasured at the end of each reporting period.
Compensation and Benefits — Incentive Fee Compensation — Incentive Fee Compensation consists of compensation paid based on Incentive Fees.
Compensation and Benefits — Performance Allocations Compensation — Performance Allocation Compensation consists of compensation paid based on Performance Allocations (which may be distributed in cash
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
or in-kind). Such compensation expense is subject to both positive and negative adjustments. Unlike Performance Allocations, compensation expense is based on the performance of individual investments held by a fund rather than on a fund by fund basis. These amounts may also include allocations of investment income from Blackstone’s principal investments, to senior managing directors and employees participating in certain profit sharing initiatives.
Other Income
Net Gains (Losses) from Fund Investment Activities in the Consolidated Statements of Operations include net realized gains (losses) from realizations and sales of investments, the net change in unrealized gains (losses) resulting from changes in the fair value of investments and interest income and expense and dividends attributable to the consolidated Blackstone Funds’ investments.
Expenses incurred by consolidated Blackstone funds are separately presented within Fund Expenses in the Consolidated Statements of Operations.
Other Income also includes amounts attributable to the Reduction of the Tax Receivable Agreement Liability. See Note 14. “Income Taxes — Other Income — Reduction of the Tax Receivable Agreement Liability” for additional information.
Income Taxes
The Blackstone Holdings Partnerships and certain of their subsidiaries operate in the U.S. as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. Accordingly, these entities in some cases are subject to New York City unincorporated business taxes or non-U.S. income taxes. In addition, certain of the wholly owned subsidiaries of the Partnership and the Blackstone Holdings Partnerships will be subject to federal, state and local corporate income taxes at the entity level and the related tax provision attributable to the Partnership’s share of this income tax is reflected in the Consolidated Financial Statements.
Income taxes are accounted for using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current and deferred tax liabilities are recorded within Accounts Payable, Accrued Expenses and Other Liabilities in the Consolidated Statements of Financial Condition.
Blackstone uses the flow-through method to account for investment tax credits. Under this method, the investment tax credits are recognized as a reduction to income tax expense.
Blackstone analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. Blackstone records unrecognized tax benefits on the basis of a two-step process: (a) determination is made whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (b) those tax positions that meet the more likely than not threshold are recognized as the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Blackstone recognizes accrued interest and penalties related to unrecognized tax benefits in General, Administrative, and Other expenses within the Consolidated Statements of Operations.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Net Income (Loss) Per Common Unit
Basic Income (Loss) Per Common Unit is calculated by dividing Net Income (Loss) Attributable to The Blackstone Group L.P. by the weighted-average number of common units, unvested participating common units outstanding for the period and vested deferred restricted common units that have been earned for which issuance of the related common units is deferred until future periods. Diluted Income (Loss) Per Common Unit reflects the assumed conversion of all dilutive securities. Diluted Income (Loss) Per Common Unit excludes the anti-dilutive effect of Blackstone Holdings Partnership Units and deferred restricted common units, as applicable.
The Partnership applies the treasury stock method to determine the dilutive weighted-average common units outstanding. The Partnership applies the “if-converted” method to the Blackstone Holdings Partnership Units to determine the dilutive weighted-average common units represented by the Blackstone Holdings Partnership Units.
Repurchase Agreements
Securities purchased under agreements to resell (“reverse repurchase agreements”) and securities sold under agreements to repurchase (“repurchase agreements”), comprised primarily of U.S. and non-U.S. government and agency securities, asset-backed securities and corporate debt, represent collateralized financing transactions. Such transactions are recorded in the Consolidated Statements of Financial Condition at their contractual amounts and include accrued interest. The carrying value of repurchase and reverse repurchase agreements approximates fair value.
The Partnership manages credit exposure arising from reverse repurchase agreements and repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties that provide the Partnership, in the event of a counterparty default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations.
The Partnership takes possession of securities purchased under reverse repurchase agreements and is permitted to repledge, deliver or otherwise use such securities. The Partnership also pledges its financial instruments to counterparties to collateralize repurchase agreements. Financial instruments pledged that can be repledged, delivered or otherwise used by the counterparty are recorded in Investments in the Consolidated Statements of Financial Condition. Additional disclosures relating to repurchase agreements are discussed in Note 10. “Repurchase Agreements”.
Blackstone does not offset assets and liabilities relating to reverse repurchase agreements and repurchase agreements in its Consolidated Statements of Financial Condition. Additional disclosures relating to offsetting are discussed in Note 12. “Offsetting of Assets and Liabilities”.
Securities Sold, Not Yet Purchased
Securities Sold, Not Yet Purchased consist of equity and debt securities that the Partnership has borrowed and sold. The Partnership is required to “cover” its short sale in the future by purchasing the security at prevailing market prices and delivering it to the counterparty from which it borrowed the security. The Partnership is exposed to loss in the event that the price at which a security may have to be purchased to cover a short sale exceeds the price at which the borrowed security was sold short.
Securities Sold, Not Yet Purchased are recorded at fair value in the Consolidated Statements of Financial Condition.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Derivative Instruments
The Partnership recognizes all derivatives as assets or liabilities on its Consolidated Statements of Financial Condition at fair value. On the date the Partnership enters into a derivative contract, it designates and documents each derivative contract as one of the following: (a) a hedge of a recognized asset or liability (“fair value hedge”), (b) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), (c) a hedge of a net investment in a foreign operation, or (d) a derivative instrument not designated as a hedging instrument (“freestanding derivative”). For a fair value hedge, Blackstone records changes in the fair value of the derivative and, to the extent that it is highly effective, changes in the fair value of the hedged asset or liability attributable to the hedged risk, in current period earnings in General, Administrative and Other in the Consolidated Statements of Operations. Changes in the fair value of derivatives designated as hedging instruments caused by factors other than changes in the risk being hedged, which are excluded from the assessment of hedge effectiveness, are recognized in current period earnings. Gains or losses on a derivative instrument that is designated as, and is effective as, an economic hedge of a net investment in a foreign operation are reported in the cumulative translation adjustment section of other comprehensive income to the extent it is effective as a hedge. The ineffective portion of a net investment hedge is recognized in current period earnings.
The Partnership formally documents at inception its hedge relationships, including identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and the Partnership’s evaluation of effectiveness of its hedged transaction. At least monthly, the Partnership also formally assesses whether the derivative it designated in each hedging relationship is expected to be, and has been, highly effective in offsetting changes in estimated fair values or cash flows of the hedged items using either the regression analysis or the dollar offset method. For net investment hedges, the Partnership uses a method based on changes in spot rates to measure effectiveness. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued. The Partnership may also at any time remove a designation of a fair value hedge. The fair values of hedging derivative instruments are reflected within Other Assets in the Consolidated Statements of Financial Condition.
For freestanding derivative contracts, the Partnership presents changes in fair value in current period earnings. Changes in the fair value of derivative instruments held by consolidated Blackstone Funds are reflected in Net Gains from Fund Investment Activities or, where derivative instruments are held by the Partnership, within Investment Income (Loss) in the Consolidated Statements of Operations. The fair value of freestanding derivative assets of the consolidated Blackstone Funds are recorded within Investments, the fair value of freestanding derivative assets that are not part of the consolidated Blackstone Funds are recorded within Other Assets and the fair value of freestanding derivative liabilities are recorded within Accounts Payable, Accrued Expenses and Other Liabilities in the Consolidated Statements of Financial Condition.
The Partnership has elected to not offset derivative assets and liabilities or financial assets in its Consolidated Statements of Financial Condition, including cash, that may be received or paid as part of collateral arrangements, even when an enforceable master netting agreement is in place that provides the Partnership, in the event of counterparty default, the right to liquidate collateral and the right to offset a counterparty’s rights and obligations.
Blackstone’s other disclosures regarding derivative financial instruments are discussed in Note 6. “Derivative Financial Instruments”.
Blackstone’s disclosures regarding offsetting are discussed in Note 12. “Offsetting of Assets and Liabilities”.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Affiliates
Blackstone considers its Founder, senior managing directors, employees, the Blackstone Funds and the Portfolio Companies to be affiliates.
Distributions
Distributions are reflected in the consolidated financial statements when declared.
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance on revenue from contracts with customers. The new guidance was effective for Blackstone beginning January 1, 2018 and was adopted on a full retrospective basis. The guidance requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity is required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. In determining the transaction price, an entity may include variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration is resolved.
Blackstone has concluded that its Management and Advisory Fees and Incentive Fees are within the scope of the amended revenue recognition guidance. The adoption of the amended guidance did not have a material impact on the recognition of Management and Advisory Fees. For Incentive Fees, the amended guidance changes the presentation and delays the recognition of revenues compared to the prior accounting treatment. These amounts were previously recognized within Realized and Unrealized Performance Fees — Incentive Fees in the Consolidated Statements of Operations. Under the amended guidance, these amounts will be recognized separately within Incentive Fees. Blackstone recorded a net reduction to Partners’ Capital of $2.2 million as of December 31, 2015, as a result of adopting the amended guidance. For the twelve months ended December 31, 2016, the impact on Total Revenues and Net Income Attributable to The Blackstone Group L.P. was an increase of $20.5 million and $0.2 million, respectively, while Net Income Per Common Unit — Basic, and Net Income Per Common Unit — Diluted remained the same. For the twelve months ended December 31, 2017, the impact on Total Revenues and Net Income Attributable to The Blackstone Group L.P. was a reduction of $26.0 million, $0.5 million, respectively, while Net Income Per Common Unit — Basic, and Net Income Per Common Unit — Diluted remained the same. Also, the reimbursement of certain costs incurred in the process of providing investment management services, primarily travel costs, that were previously presented net in the Consolidated Statements of Operations are presented gross under the amended guidance. For the twelve months ended December 31, 2016 and 2017, these costs were $21.3 million and $22.3 million, respectively, and are presented in General, Administrative and Other Expenses with the related reimbursement presented in Management and Advisory Fees, Net in the Consolidated Statements of Operations.
Blackstone has concluded that investments made alongside its limited partners in a partnership which entitle Blackstone to a pro-rata allocation and a disproportionate Performance Allocation represent equity method investments that are not in the scope of the amended revenue recognition guidance. Therefore, effective January 1, 2018, Blackstone amended the recognition and measurement of Performance Allocations. This accounting change will not change the timing or amount of revenue recognized related to Performance Allocation arrangements. These amounts were previously recognized within Realized and Unrealized Performance Fees — Carried Interest and Incentive Fees
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
in the Consolidated Statements of Operations. Under the equity method of accounting Blackstone recognizes Performance Allocations within Investment Income along with the allocations proportionate to Blackstone’s ownership interests in the Blackstone Funds. Blackstone applied a retrospective application consistent with the requirements for presentation of a change in accounting principle.
In January 2016, the FASB issued amended guidance on the classification and measurement of financial instruments. The new guidance was effective for Blackstone beginning on January 1, 2018 and was adopted on a modified retrospective basis. However, changes to the accounting for equity securities without a readily determinable fair value were applied prospectively as permitted under the guidance. Adoption did not have a material impact on Blackstone’s consolidated financial statements.
In February 2016, the FASB issued amended guidance on the accounting for leases. The guidance requires the recognition of lease assets and lease liabilities for those leases classified as operating leases under previous GAAP. The guidance retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases under previous GAAP. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not changed significantly from previous GAAP.
For operating leases, a lessee is required to do the following: (a) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the Statement of Financial Condition, (b) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and (c) classify all cash payments within operating activities in the statement of cash flows.
The guidance is effective for fiscal periods beginning after December 15, 2018. In July 2018, the FASB issued targeted improvements to the amended guidance, which included a new transition method allowing entities to initially apply the new leases standard at the adoption date (January 1, 2019 for Blackstone) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Prior to that issuance, adoption was required on a modified retrospective basis. Blackstone expects to elect the new transition alternative upon adoption, and also expects to elect a package of practical expedients made available earlier by the FASB which result in no requirement to reassess (a) whether any expired or existing contracts are or contain leases, (b) the lease classification for any expired or existing leases or (c) the recognition requirements for initial direct costs for any existing leases. Blackstone is finalizing the impact of the amended guidance on the Consolidated Statement of Financial Condition, which is expected to result in recognition of an operating liability equal to the present value of the remaining lease payments on existing leases as of January 1, 2019 and a corresponding right-of-use asset. The amended guidance is not expected to have a material impact on the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.
In November 2016, the FASB issued amended guidance on classification and presentation of restricted cash on the statement of cash flows. The new guidance was effective for Blackstone beginning on January 1, 2018 and was adopted on a retrospective basis. Under the new guidance, reporting entities are required to explain the changes in the combined total of restricted and unrestricted balances in the statement of cash flows. Therefore, amounts generally described as restricted cash or restricted cash equivalents (hereinafter referred to as “restricted cash”) should be combined with unrestricted cash and cash equivalents when reconciling the beginning and end of period balances on the statement of cash flows. Reporting entities are also required to disclose how the statement of cash flows reconciles to the balance sheet in any situation in which the balance sheet includes more than one line item of
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
cash, cash equivalents, and restricted cash. For the twelve months ended December 31, 2016 the new guidance resulted in a decrease in Net Cash Used in Operating Activities of $452.7 million, a decrease in Net Cash Used in Investing Activities of $7.2 million, and a decrease in Effect of Exchange Rate Changes on Cash and Cash Equivalents, Cash Held by Blackstone Funds, and Restricted Cash of $34.1 million. For the twelve months ended December 31, 2017 the new guidance resulted in a decrease in Net Cash Used in Operating Activities of $822.3 million, an increase in Net Cash Used in Investing Activities of $5.1 million, and an increase in Effect of Exchange Rate Changes on Cash and Cash Equivalents, Cash Held by Blackstone Funds, and Restricted Cash of $103.0 million. Additionally, the new guidance increased the December 31, 2015 End of Period, December 31, 2016 End of Period and December 31, 2017 End of Period balances by $597.9 million, $1.0 billion and $1.9 billion, respectively, in the Consolidated Statement of Cash Flows for the twelve months ended December 31, 2016 and 2017.
In August 2018, the FASB issued amended guidance on the disclosure requirements for fair value measurement. The amended guidance added, eliminated and modified disclosures for investments measured at fair value. The guidance is effective January 1, 2020. However, Blackstone has early adopted the amendments, as is permitted, for the period ended September 30, 2018. The impact of the amended guidance on Blackstone was the removal of the requirements to disclose (a) the amount and reasons for transfers between Level I and Level II investments of the fair value hierarchy, (b) the policy for timing of transfers between levels and (c) the valuation process for Level III fair value measurements. The amended guidance also required modification to Blackstone’s disclosure to clarify that information regarding measurement uncertainty is provided as of the relevant reporting date. The requirements to provide additional disclosures did not impact Blackstone as those disclosures had already been provided in prior periods.
| 3. | GOODWILL AND INTANGIBLE ASSETS |
|---|
On November 30, 2018, Blackstone completed its acquisition of Clarus, a global life sciences investment firm, which resulted in an increase of Goodwill of $91.7 million and an increase in Intangible Assets, primarily comprising of contractual rights to earn future fee income, of $117.7 million. Goodwill arising from the acquisition has been allocated to the Private Equity segment.
The carrying value of Goodwill was $1.9 billion and $1.8 billion as of December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the Partnership determined there was no evidence of Goodwill impairment.
At December 31, 2018, Goodwill has been allocated to each of the Partnership’s four segments as follows: Real Estate ($421.7 million), Private Equity ($870.0 million), Hedge Fund Solutions ($172.1 million), and Credit ($406.1 million). At December 31, 2017, Goodwill has been allocated to each of the Partnership’s four segments as follows: Real Estate ($421.7 million), Private Equity ($778.3 million), Hedge Fund Solutions ($172.1 million), and Credit ($406.1 million).
Intangible Assets, Net consists of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Finite-Lived Intangible Assets / Contractual Rights | $ | 1,712,576 | $ | 1,594,876 | ||||
| Accumulated Amortization | (1,244,069 | ) | (1,185,048 | ) | ||||
| Intangible Assets, Net | $ | 468,507 | $ | 409,828 | ||||
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Changes in the Partnership’s Intangible Assets, Net consists of the following:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Balance, Beginning of Year | $ | 409,828 | $ | 262,604 | $ | 345,547 | ||||||
| Amortization Expense | (59,021 | ) | (46,776 | ) | (82,943 | ) | ||||||
| Acquisitions | 117,700 | 194,000 | — | |||||||||
| Balance, End of Year | $ | 468,507 | $ | 409,828 | $ | 262,604 | ||||||
Amortization of Intangible Assets held at December 31, 2018 is expected to be $71.0 million, $71.0 million, $71.0 million, $63.3 million and $34.3 million for each of the years ending December 31, 2019, 2020, 2021, 2022, and 2023, respectively. Blackstone’s Intangible Assets as of December 31, 2018 are expected to amortize over a weighted-average period of 8.6 years.
| 4. | INVESTMENTS |
|---|
Investments consist of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Investments of Consolidated Blackstone Funds | $ | 8,376,338 | $ | 12,954,121 | ||||
| Equity Method Investments | ||||||||
| Partnership Investments | 3,649,423 | 3,263,131 | ||||||
| Accrued Performance Allocations | 5,883,924 | 5,328,280 | ||||||
| Corporate Treasury Investments | 2,206,493 | 2,566,043 | ||||||
| Other Investments | 260,853 | 322,474 | ||||||
| $ | 20,377,031 | $ | 24,434,049 | |||||
Blackstone’s share of Investments of Consolidated Blackstone Funds totaled $366.5 million and $488.4 million at December 31, 2018 and December 31, 2017, respectively.
Investments of Consolidated Blackstone Funds
The following table presents the Realized and Net Change in Unrealized Gains (Losses) on investments held by the consolidated Blackstone Funds and a reconciliation to Other Income — Net Gains from Fund Investment Activities in the Consolidated Statements of Operations:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Realized Gains | $ | 74,784 | $ | 165,106 | $ | 123,524 | ||||||
| Net Change in Unrealized Losses | (54,697 | ) | (21,016 | ) | (61,045 | ) | ||||||
| Realized and Net Change in Unrealized Gains (Losses) from Consolidated Blackstone Funds | 20,087 | 144,090 | 62,479 | |||||||||
| Interest and Dividend Revenue Attributable to Consolidated Blackstone Funds | 171,635 | 177,507 | 122,271 | |||||||||
| Other Income — Net Gains from Fund Investment Activities | $ | 191,722 | $ | 321,597 | $ | 184,750 | ||||||
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Equity Method Investments
Blackstone’s equity method investments include Partnership Investments, which represent the pro rata investments, and any associated Accrued Performance Allocations, in private equity funds, real estate funds, funds of hedge funds and credit-focused funds. Partnership Investments also includes the 40% non-controlling interest in Pátria Investments Limited and Pátria Investimentos Ltda. (collectively, “Pátria”).
Blackstone evaluates each of its equity method investments, excluding Accrued Performance Allocations, to determine if any were significant as defined by guidance from the United States Securities and Exchange Commission (“SEC”). As of and for the years ended December 31, 2018, 2017 and 2016, no individual equity method investment held by Blackstone met the significance criteria. As such, Blackstone is not required to present separate financial statements for any of its equity method investments.
Partnership Investments
Blackstone recognized net gains related to its Partnership Investments accounted for under the equity method of $430.6 million, $609.5 million and $214.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The summarized financial information of the Partnership’s equity method investments for December 31, 2018 are as follows:
| December 31, 2018 and the Year Then Ended | ||||||||||||||||||||||||
| Real | Private | Hedge Fund | ||||||||||||||||||||||
| Estate | Equity | Solutions | Credit | Other (a) | Total | |||||||||||||||||||
| Statement of Financial Condition | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Investments | $ | 89,742,226 | $ | 79,718,783 | $ | 26,336,573 | $ | 24,634,380 | $ | 353 | $ | 220,432,315 | ||||||||||||
| Other Assets | 3,542,235 | 2,257,152 | 3,119,639 | 1,706,579 | 125,007 | 10,750,612 | ||||||||||||||||||
| Total Assets | $ | 93,284,461 | $ | 81,975,935 | $ | 29,456,212 | $ | 26,340,959 | $ | 125,360 | $ | 231,182,927 | ||||||||||||
| Liabilities and Partners’ Capital | ||||||||||||||||||||||||
| Debt | $ | 15,081,536 | $ | 9,989,289 | $ | 350,982 | $ | 5,087,998 | $ | — | $ | 30,509,805 | ||||||||||||
| Other Liabilities | 3,568,159 | 749,043 | 1,529,466 | 1,338,712 | 28,295 | 7,213,675 | ||||||||||||||||||
| Total Liabilities | 18,649,695 | 10,738,332 | 1,880,448 | 6,426,710 | 28,295 | 37,723,480 | ||||||||||||||||||
| Partners’ Capital | 74,634,766 | 71,237,603 | 27,575,764 | 19,914,249 | 97,065 | 193,459,447 | ||||||||||||||||||
| Total Liabilities and Partners’ Capital | $ | 93,284,461 | $ | 81,975,935 | $ | 29,456,212 | $ | 26,340,959 | $ | 125,360 | $ | 231,182,927 | ||||||||||||
| Statement of Operations | ||||||||||||||||||||||||
| Interest Income | $ | 377,615 | $ | 1,022,387 | $ | 6,695 | $ | 1,130,490 | $ | — | $ | 2,537,187 | ||||||||||||
| Other Income | 1,244,754 | 92,696 | 166,842 | 417,883 | 106,525 | 2,028,700 | ||||||||||||||||||
| Interest Expense | (518,137 | ) | (278,348 | ) | (17,780 | ) | (228,734 | ) | — | (1,042,999 | ) | |||||||||||||
| Other Expenses | (921,990 | ) | (903,737 | ) | (150,135 | ) | (547,612 | ) | (65,249 | ) | (2,588,723 | ) | ||||||||||||
| Net Realized and Unrealized Gain (Loss) from Investments | 4,437,434 | 10,172,066 | 352,018 | (733,747 | ) | — | 14,227,771 | |||||||||||||||||
| Net Income | $ | 4,619,676 | $ | 10,105,064 | $ | 357,640 | $ | 38,280 | $ | 41,276 | $ | 15,161,936 | ||||||||||||
| (a) | Other represents the summarized financial information of equity method investments whose results, for segment reporting purposes, have been allocated across more than one of Blackstone’s segments. |
|---|
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The summarized financial information of the Partnership’s equity method investments for December 31, 2017 are as follows:
| December 31, 2017 and the Year Then Ended | ||||||||||||||||||||||||
| Real | Private | Hedge Fund | ||||||||||||||||||||||
| Estate | Equity | Solutions | Credit | Other (a) | Total | |||||||||||||||||||
| Statement of Financial Condition | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Investments | $ | 67,780,737 | $ | 50,339,913 | $ | 21,639,763 | $ | 22,593,717 | $ | 363 | $ | 162,354,493 | ||||||||||||
| Other Assets | 3,077,573 | 2,283,602 | 1,969,832 | 1,573,279 | 154,131 | 9,058,417 | ||||||||||||||||||
| Total Assets | $ | 70,858,310 | $ | 52,623,515 | $ | 23,609,595 | $ | 24,166,996 | $ | 154,494 | $ | 171,412,910 | ||||||||||||
| Liabilities and Partners’ Capital | ||||||||||||||||||||||||
| Debt | $ | 6,329,068 | $ | 6,779,634 | $ | 53,787 | $ | 4,896,346 | $ | — | $ | 18,058,835 | ||||||||||||
| Other Liabilities | 1,618,408 | 430,763 | 1,150,307 | 420,988 | 39,923 | 3,660,389 | ||||||||||||||||||
| Total Liabilities | 7,947,476 | 7,210,397 | 1,204,094 | 5,317,334 | 39,923 | 21,719,224 | ||||||||||||||||||
| Partners’ Capital | 62,910,834 | 45,413,118 | 22,405,501 | 18,849,662 | 114,571 | 149,693,686 | ||||||||||||||||||
| Total Liabilities and Partners’ Capital | $ | 70,858,310 | $ | 52,623,515 | $ | 23,609,595 | $ | 24,166,996 | $ | 154,494 | $ | 171,412,910 | ||||||||||||
| Statement of Operations | ||||||||||||||||||||||||
| Interest Income | $ | 485,751 | $ | 362,788 | $ | 2,942 | $ | 928,670 | $ | — | $ | 1,780,151 | ||||||||||||
| Other Income | 1,334,544 | 45,770 | 91,006 | 178,281 | 107,204 | 1,756,805 | ||||||||||||||||||
| Interest Expense | (180,258 | ) | (121,876 | ) | (2,086 | ) | (127,153 | ) | — | (431,373 | ) | |||||||||||||
| Other Expenses | (703,165 | ) | (568,369 | ) | (435,974 | ) | (258,157 | ) | (57,830 | ) | (2,023,495 | ) | ||||||||||||
| Net Realized and Unrealized Gain from Investments | 12,223,852 | 7,892,937 | 1,054,516 | 584,366 | — | 21,755,671 | ||||||||||||||||||
| Net Income | $ | 13,160,724 | $ | 7,611,250 | $ | 710,404 | $ | 1,306,007 | $ | 49,374 | $ | 22,837,759 | ||||||||||||
| (a) | Other represents the summarized financial information of equity method investments whose results, for segment reporting purposes, have been allocated across more than one of Blackstone’s segments. |
|---|
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The summarized financial information of the Partnership’s equity method investments for December 31, 2016 are as follows:
| December 31, 2016 and the Year Then Ended | ||||||||||||||||||||||||
| Real | Private | Hedge Fund | ||||||||||||||||||||||
| Estate | Equity | Solutions | Credit | Other (a) | Total | |||||||||||||||||||
| Statement of Financial Condition | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Investments | $ | 62,370,093 | $ | 49,751,021 | $ | 21,007,134 | $ | 17,804,292 | $ | 7,354 | $ | 150,939,894 | ||||||||||||
| Other Assets | 4,384,031 | 2,815,042 | 2,434,590 | 1,478,119 | 173,917 | 11,285,699 | ||||||||||||||||||
| Total Assets | $ | 66,754,124 | $ | 52,566,063 | $ | 23,441,724 | $ | 19,282,411 | $ | 181,271 | $ | 162,225,593 | ||||||||||||
| Liabilities and Partners’ Capital | ||||||||||||||||||||||||
| Debt | $ | 4,034,184 | $ | 3,715,079 | $ | 73,915 | $ | 2,495,778 | $ | — | $ | 10,318,956 | ||||||||||||
| Other Liabilities | 1,591,727 | 1,254,211 | 1,837,583 | 701,986 | 51,266 | 5,436,773 | ||||||||||||||||||
| Total Liabilities | 5,625,911 | 4,969,290 | 1,911,498 | 3,197,764 | 51,266 | 15,755,729 | ||||||||||||||||||
| Partners’ Capital | 61,128,213 | 47,596,773 | 21,530,226 | 16,084,647 | 130,005 | 146,469,864 | ||||||||||||||||||
| Total Liabilities and Partners’ Capital | $ | 66,754,124 | $ | 52,566,063 | $ | 23,441,724 | $ | 19,282,411 | $ | 181,271 | $ | 162,225,593 | ||||||||||||
| Statement of Operations | ||||||||||||||||||||||||
| Interest Income | $ | 445,166 | $ | 353,179 | $ | 439 | $ | 849,508 | $ | — | $ | 1,648,292 | ||||||||||||
| Other Income | 1,499,503 | 10,620 | 35,264 | 32,628 | 104,669 | 1,682,684 | ||||||||||||||||||
| Interest Expense | (141,097 | ) | (82,370 | ) | (1,410 | ) | (157,921 | ) | — | (382,798 | ) | |||||||||||||
| Other Expenses | (605,538 | ) | (473,790 | ) | (150,964 | ) | (224,345 | ) | (56,407 | ) | (1,511,044 | ) | ||||||||||||
| Net Realized and Unrealized Gain from Investments | 5,368,361 | 4,870,332 | 226,368 | 1,186,038 | 515 | 11,651,614 | ||||||||||||||||||
| Net Income | $ | 6,566,395 | $ | 4,677,971 | $ | 109,697 | $ | 1,685,908 | $ | 48,777 | $ | 13,088,748 | ||||||||||||
| (a) | Other represents the summarized financial information of equity method investments whose results, for segment reporting purposes, have been allocated across more than one of Blackstone’s segments. |
|---|
Accrued Performance Allocations
Accrued Performance Allocations to the Partnership in respect of certain Blackstone Funds were as follows:
| Real Estate | Private Equity | Hedge Fund Solutions | Credit | Total | ||||||||||||||||
| Accrued Performance Allocations, December 31, 2017 | $ | 2,859,307 | $ | 1,916,971 | $ | 13,802 | $ | 538,200 | $ | 5,328,280 | ||||||||||
| Performance Allocations as a Result of Changes in Fund Fair Values | 991,133 | 1,456,671 | 33,185 | (16,058 | ) | 2,464,931 | ||||||||||||||
| Foreign Exchange Loss | (27,051 | ) | — | — | — | (27,051 | ) | |||||||||||||
| Fund Distributions | (970,128 | ) | (731,523 | ) | (24,066 | ) | (156,519 | ) | (1,882,236 | ) | ||||||||||
| Accrued Performance Allocations, December 31, 2018 | $ | 2,853,261 | $ | 2,642,119 | $ | 22,921 | $ | 365,623 | $ | 5,883,924 | ||||||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Corporate Treasury Investments
The portion of corporate treasury investments included in Investments represents the Partnership’s investments into primarily fixed income securities, mutual fund interests, and other fund interests. These strategies are managed by a combination of Blackstone personnel and third party advisors. The following table presents the Realized and Net Change in Unrealized Gains (Losses) on these investments:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Realized Gains (Losses) | $ | (1,024 | ) | $ | 4,378 | $ | (20,263 | ) | ||||
| Net Change in Unrealized Gains (Losses) | (38,113 | ) | 50,222 | 19,671 | ||||||||
| $ | (39,137 | ) | $ | 54,600 | $ | (592 | ) | |||||
Other Investments
Other Investments consist primarily of proprietary investment securities held by Blackstone. Other Investments include equity investments without readily determinable fair values which have a carrying value of $49.4 million as of December 31, 2018. The following table presents Blackstone’s Realized and Net Change in Unrealized Gains in Other Investments:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Realized Gains | $ | 56,381 | $ | 4,886 | $ | 2,495 | ||||||
| Net Change in Unrealized Gains | 20,335 | 14,324 | 11,128 | |||||||||
| $ | 76,716 | $ | 19,210 | $ | 13,623 | |||||||
| 5. | NET ASSET VALUE AS FAIR VALUE |
|---|
A summary of fair value by strategy type alongside the remaining unfunded commitments and ability to redeem such investments as of December 31, 2018 is presented below:
| Strategy | Fair Value | Unfunded Commitments | Redemption Frequency (if currently eligible) | Redemption Notice Period | ||||||||||||
| Diversified Instruments | $ | 209,496 | $ | 127 | (a | ) | (a | ) | ||||||||
| Credit Driven | 99,483 | 268 | (b | ) | (b | ) | ||||||||||
| Equity | 37,308 | — | (c | ) | (c | ) | ||||||||||
| Commodities | 1,846 | — | (d | ) | (d | ) | ||||||||||
| $ | 348,133 | $ | 395 | |||||||||||||
| (a) | Diversified Instruments include investments in funds that invest across multiple strategies. Investments representing 3% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. The remaining 97% of investments in this category are redeemable as of the reporting date. |
|---|
| (b) | The Credit Driven category includes investments in hedge funds that invest primarily in domestic and international bonds. Investments representing 43% of the fair value of the investments in this category may not |
|---|
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| be redeemed at, or within three months of, the reporting date. The remaining 57% of investments in this category are redeemable as of the reporting date. |
|---|
| (c) | The Equity category includes investments in hedge funds that invest primarily in domestic and international equity securities. Investments representing 100% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. As of the reporting date, the investee fund manager had elected to side-pocket 8% of Blackstone’s investments in the category. |
|---|
| (d) | The Commodities category includes investments in commodities-focused funds that primarily invest in futures and physical-based commodity driven strategies. Investments representing 100% of the fair value of the investments in this category may not be redeemed at, or within three months of, the reporting date. |
|---|
| 6. | DERIVATIVE FINANCIAL INSTRUMENTS |
|---|
Blackstone and the consolidated Blackstone Funds enter into derivative contracts in the normal course of business to achieve certain risk management objectives and for general investment purposes. Blackstone may enter into derivative contracts in order to hedge its interest rate risk exposure against the effects of interest rate changes. Additionally, Blackstone may also enter into derivative contracts in order to hedge its foreign currency risk exposure against the effects of a portion of its non-U.S. dollar denominated currency net investments. As a result of the use of derivative contracts, Blackstone and the consolidated Blackstone Funds are exposed to the risk that counterparties will fail to fulfill their contractual obligations. To mitigate such counterparty risk, Blackstone and the consolidated Blackstone Funds enter into contracts with certain major financial institutions, all of which have investment grade ratings. Counterparty credit risk is evaluated in determining the fair value of derivative instruments.
Net Investment Hedges
Blackstone uses foreign currency forward contracts to hedge portions of Blackstone’s net investments in foreign operations. The gains and losses due to change in fair value attributable to changes in spot exchange rates on foreign currency derivatives designated as net investment hedges were recognized in Other Comprehensive Income (Loss), Net of Tax — Currency Translation Adjustment. For the year ended December 31, 2018 the resulting loss was $1.4 million.
Freestanding Derivatives
Freestanding derivatives are instruments that Blackstone and certain of the consolidated Blackstone Funds have entered into as part of their overall risk management and investment strategies. These derivative contracts are not designated as hedging instruments for accounting purposes. Such contracts may include interest rate swaps, foreign exchange contracts, equity swaps, options, futures and other derivative contracts.
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The table below summarizes the aggregate notional amount and fair value of the derivative financial instruments. The notional amount represents the absolute value amount of all outstanding derivative contracts.
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
| Notional | Fair Value | Notional | Fair Value | Notional | Fair Value | Notional | Fair Value | |||||||||||||||||||||||||
| Net Investment Hedges | ||||||||||||||||||||||||||||||||
| Foreign Currency Contracts | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 50,857 | $ | 453 | ||||||||||||||||
| Freestanding Derivatives | ||||||||||||||||||||||||||||||||
| Blackstone | ||||||||||||||||||||||||||||||||
| Interest Rate Contracts | 798,137 | 43,632 | 844,620 | 39,164 | 225,550 | 2,042 | 1,530,751 | 27,275 | ||||||||||||||||||||||||
| Foreign Currency Contracts | 224,841 | 1,286 | 245,371 | 1,636 | 279,050 | 2,097 | 296,252 | 2,975 | ||||||||||||||||||||||||
| Credit Default Swaps | — | — | 34,060 | 4,004 | 2,073 | 304 | 2,073 | 304 | ||||||||||||||||||||||||
| Investments of Consolidated Blackstone Funds | ||||||||||||||||||||||||||||||||
| Foreign Currency Contracts | 108,271 | 524 | 16,952 | 164 | 493,181 | 24,087 | 264,693 | 5,628 | ||||||||||||||||||||||||
| Interest Rate Contracts | — | — | 10,000 | 311 | — | — | — | — | ||||||||||||||||||||||||
| Credit Default Swaps | 20,952 | 55 | 46,685 | 5,710 | 45,670 | 3,731 | 45,582 | 5,163 | ||||||||||||||||||||||||
| Total Return Swaps | — | — | 31,440 | 1,855 | 25,645 | 526 | — | — | ||||||||||||||||||||||||
| 1,152,201 | 45,497 | 1,229,128 | 52,844 | 1,071,169 | 32,787 | 2,139,351 | 41,345 | |||||||||||||||||||||||||
| $ | 1,152,201 | $ | 45,497 | $ | 1,229,128 | $ | 52,844 | $ | 1,071,169 | $ | 32,787 | $ | 2,190,208 | $ | 41,798 | |||||||||||||||||
The table below summarizes the impact to the Consolidated Statements of Operations from derivative financial instruments:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Net Investment Hedges — Foreign Currency Contracts | ||||||||||||
| Hedge Ineffectiveness | $ | (8 | ) | $ | (75 | ) | $ | (108 | ) | |||
| Freestanding Derivatives | ||||||||||||
| Realized Gains (Losses) | ||||||||||||
| Interest Rate Contracts | $ | 2,968 | $ | (2,400 | ) | $ | (1,600 | ) | ||||
| Foreign Currency Contracts | 10,761 | (6,333 | ) | (5,079 | ) | |||||||
| Credit Default Swaps | (539 | ) | (3,764 | ) | (5,141 | ) | ||||||
| Total Return Swaps | 145 | 295 | — | |||||||||
| Equity Options | (120 | ) | (417 | ) | — | |||||||
| $ | 13,215 | $ | (12,619 | ) | $ | (11,820 | ) | |||||
| Net Change in Unrealized Gains (Losses) | ||||||||||||
| Interest Rate Contracts | 36,472 | (24,629 | ) | 1,253 | ||||||||
| Foreign Currency Contracts | (6,682 | ) | (3,556 | ) | 25,839 | |||||||
| Credit Default Swaps | (521 | ) | 4,881 | (3,027 | ) | |||||||
| Total Return Swaps | (2,107 | ) | (447 | ) | — | |||||||
| Equity Options | — | 129 | — | |||||||||
| $ | 27,162 | $ | (23,622 | ) | $ | 24,065 | ||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
As of December 31, 2018, 2017 and 2016, the Partnership had not designated any derivatives as cash flow hedges.
| 7. | FAIR VALUE OPTION |
|---|
The following table summarizes the financial instruments for which the fair value option has been elected:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Assets | ||||||||
| Loans and Receivables | $ | 304,173 | $ | 239,659 | ||||
| Equity and Preferred Securities | 390,095 | 475,485 | ||||||
| Debt Securities | 529,698 | 418,061 | ||||||
| Assets of Consolidated CLO Vehicles | ||||||||
| Corporate Loans | 6,766,700 | 10,825,759 | ||||||
| Corporate Bonds | — | 690,125 | ||||||
| Other | — | 458 | ||||||
| $ | 7,990,666 | $ | 12,649,547 | |||||
| Liabilities | ||||||||
| Liabilities of Consolidated CLO Vehicles | ||||||||
| Senior Secured Notes | ||||||||
| Loans Payable | $ | 6,473,233 | $ | 10,594,656 | ||||
| Due to Affiliates | 3,201 | 996 | ||||||
| Subordinated Notes | ||||||||
| Loans Payable | 7,478 | 703,164 | ||||||
| Due to Affiliates | 52,811 | 40,390 | ||||||
| $ | 6,536,723 | $ | 11,339,206 | |||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The following table presents the Realized and Net Change in Unrealized Gains (Losses) on financial instruments on which the fair value option was elected:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| Realized Gains (Losses) | Net Change in Unrealized Gains (Losses) | Realized Gains (Losses) | Net Change in Unrealized Gains (Losses) | Realized Gains (Losses) | Net Change in Unrealized Gains (Losses) | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Loans and Receivables | $ | 291 | $ | (447 | ) | $ | (1,214 | ) | $ | 6,590 | $ | (42 | ) | $ | 3,375 | |||||||||
| Equity and Preferred Securities | 3,451 | (3,589 | ) | 4,611 | 22,326 | (476 | ) | 16,033 | ||||||||||||||||
| Debt Securities | (1,105 | ) | (29,069 | ) | 4,866 | (3,390 | ) | (2,404 | ) | 426 | ||||||||||||||
| Assets of Consolidated CLO Vehicles | ||||||||||||||||||||||||
| Corporate Loans | (8,749 | ) | (285,698 | ) | (3,827 | ) | (6,603 | ) | (6,128 | ) | 66,601 | |||||||||||||
| Corporate Bonds | (24,056 | ) | 9,693 | 12,442 | (36,219 | ) | 4,793 | 18,859 | ||||||||||||||||
| Other | — | 6 | — | 454 | 264 | — | ||||||||||||||||||
| $ | (30,168 | ) | $ | (309,104 | ) | $ | 16,878 | $ | (16,842 | ) | $ | (3,993 | ) | $ | 105,294 | |||||||||
| Liabilities | ||||||||||||||||||||||||
| Liabilities of Consolidated CLO Vehicles | ||||||||||||||||||||||||
| Senior Secured Notes | $ | — | $ | 51,048 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Subordinated Notes | — | 254,966 | — | 81,460 | (2,400 | ) | (69,103 | ) | ||||||||||||||||
| $ | — | $ | 306,014 | $ | — | $ | 81,460 | $ | (2,400 | ) | $ | (69,103 | ) | |||||||||||
The following table presents information for those financial instruments for which the fair value option was elected:
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
| For Financial Assets Past Due (a) | For Financial Assets Past Due (a) | |||||||||||||||||||||||
| Excess (Deficiency) of Fair Value Over Principal | Fair Value | Excess (Deficiency) of Fair Value Over Principal | Excess (Deficiency) of Fair Value Over Principal | Fair Value | Excess (Deficiency) of Fair Value Over Principal | |||||||||||||||||||
| Loans and Receivables | $ | 2,421 | $ | — | $ | — | $ | 1,207 | $ | — | $ | — | ||||||||||||
| Debt Securities | (26,660 | ) | — | — | (372 | ) | — | — | ||||||||||||||||
| Assets of Consolidated CLO Vehicles | ||||||||||||||||||||||||
| Corporate Loans | (301,085 | ) | — | — | (13,495 | ) | 57,778 | (19,633 | ) | |||||||||||||||
| Corporate Bonds | — | — | — | (21,455 | ) | — | — | |||||||||||||||||
| $ | (325,324 | ) | $ | — | $ | — | $ | (34,115 | ) | $ | 57,778 | $ | (19,633 | ) | ||||||||||
| (a) | Corporate Loans and Corporate Bonds within CLO assets are classified as past due if contractual payments are more than one day past due. |
|---|
As of December 31, 2018 and 2017, no Loans and Receivables for which the fair value option was elected were past due or in non-accrual status. As of December 31, 2018 and 2017, no Corporate Bonds included within the Assets of Consolidated CLO Vehicles for which the fair value option was elected were past due or in non-accrual status.
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| 8. | FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS |
|---|
The following tables summarize the valuation of the Partnership’s financial assets and liabilities by the fair value hierarchy:
| December 31, 2018 | ||||||||||||||||||||
| Level I | Level II | Level III | NAV | Total | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and Cash Equivalents — Money Market Funds and Short-Term Investments | $ | 623,526 | $ | — | $ | — | $ | — | $ | 623,526 | ||||||||||
| Investments | ||||||||||||||||||||
| Investments of Consolidated Blackstone Funds (a) | ||||||||||||||||||||
| Investment Funds | — | — | — | 80,726 | 80,726 | |||||||||||||||
| Equity Securities | 42,937 | 34,946 | 201,566 | — | 279,449 | |||||||||||||||
| Partnership and LLC Interests | — | 7,170 | 355,273 | — | 362,443 | |||||||||||||||
| Debt Instruments | — | 752,622 | 133,819 | — | 886,441 | |||||||||||||||
| Freestanding Derivatives | ||||||||||||||||||||
| Foreign Currency Contracts | — | 524 | — | — | 524 | |||||||||||||||
| Credit Default Swaps | — | 55 | — | — | 55 | |||||||||||||||
| Assets of Consolidated CLO Vehicles | ||||||||||||||||||||
| Corporate Loans | — | 6,093,342 | 673,358 | — | 6,766,700 | |||||||||||||||
| Total Investments of Consolidated Blackstone Funds | 42,937 | 6,888,659 | 1,364,016 | 80,726 | 8,376,338 | |||||||||||||||
| Corporate Treasury Investments | ||||||||||||||||||||
| Equity Securities | 233,834 | — | — | — | 233,834 | |||||||||||||||
| Debt Instruments | 243,297 | 1,444,968 | 24,568 | — | 1,712,833 | |||||||||||||||
| Other | — | — | — | 259,826 | 259,826 | |||||||||||||||
| Total Corporate Treasury Investments | 477,131 | 1,444,968 | 24,568 | 259,826 | 2,206,493 | |||||||||||||||
| Other Investments | 176,432 | — | 31,617 | 7,581 | 215,630 | |||||||||||||||
| Total Investments | 696,500 | 8,333,627 | 1,420,201 | 348,133 | 10,798,461 | |||||||||||||||
| Accounts Receivable — Loans and Receivables | — | — | 304,173 | — | 304,173 | |||||||||||||||
| Other Assets | ||||||||||||||||||||
| Freestanding Derivatives | ||||||||||||||||||||
| Interest Rate Contracts | 1,274 | 42,358 | — | — | 43,632 | |||||||||||||||
| Foreign Currency Contracts | — | 1,286 | — | — | 1,286 | |||||||||||||||
| Total Other Assets | 1,274 | 43,644 | — | — | 44,918 | |||||||||||||||
| $ | 1,321,300 | $ | 8,377,271 | $ | 1,724,374 | $ | 348,133 | $ | 11,771,078 | |||||||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| December 31, 2018 | ||||||||||||||||
| Level I | Level II | Level III | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Loans Payable — Liabilities of Consolidated CLO Vehicles (a) | ||||||||||||||||
| Senior Secured Notes (b) | $ | — | $ | 6,473,233 | $ | — | $ | 6,473,233 | ||||||||
| Subordinated Notes (b) | — | 7,478 | — | 7,478 | ||||||||||||
| Total Loans Payable | — | 6,480,711 | — | 6,480,711 | ||||||||||||
| Due to Affiliates — Liabilities of Consolidated CLO Vehicles (a) | ||||||||||||||||
| Senior Secured Notes (b) | — | 3,201 | — | 3,201 | ||||||||||||
| Subordinated Notes (b) | — | 52,811 | — | 52,811 | ||||||||||||
| Total Due to Affiliates | — | 56,012 | — | 56,012 | ||||||||||||
| Securities Sold, Not Yet Purchased | 35,959 | 106,658 | — | 142,617 | ||||||||||||
| Accounts Payable, Accrued Expenses and Other Liabilities | ||||||||||||||||
| Liabilities of Consolidated Blackstone Funds — | ||||||||||||||||
| Freestanding Derivatives (a) | ||||||||||||||||
| Foreign Currency Contracts | — | 164 | — | 164 | ||||||||||||
| Credit Default Swaps | — | 5,710 | — | 5,710 | ||||||||||||
| Total Return Swaps | — | 1,855 | — | 1,855 | ||||||||||||
| Interest Rate Swaps | — | 311 | — | 311 | ||||||||||||
| Total Liabilities of Consolidated Blackstone Funds | — | 8,040 | — | 8,040 | ||||||||||||
| Freestanding Derivatives | ||||||||||||||||
| Interest Rate Contracts | 3,080 | 36,084 | — | 39,164 | ||||||||||||
| Foreign Currency Contracts | — | 1,636 | — | 1,636 | ||||||||||||
| Credit Default Swaps | — | 4,004 | — | 4,004 | ||||||||||||
| Total Freestanding Derivatives | 3,080 | 41,724 | — | 44,804 | ||||||||||||
| Total Accounts Payable, Accrued Expenses and Other Liabilities | 3,080 | 49,764 | — | 52,844 | ||||||||||||
| $ | 39,039 | $ | 6,693,145 | $ | — | $ | 6,732,184 | |||||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| December 31, 2017 | ||||||||||||||||||||
| Level I | Level II | Level III | NAV | Total | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and Cash Equivalents — Money Market Funds | $ | 853,680 | $ | — | $ | — | $ | — | $ | 853,680 | ||||||||||
| Investments | ||||||||||||||||||||
| Investments of Consolidated Blackstone Funds (a) | ||||||||||||||||||||
| Investment Funds | — | — | — | 130,339 | 130,339 | |||||||||||||||
| Equity Securities | 67,443 | 44,026 | 131,867 | — | 243,336 | |||||||||||||||
| Partnership and LLC Interests | — | 2,549 | 331,448 | — | 333,997 | |||||||||||||||
| Debt Instruments | — | 643,608 | 58,155 | — | 701,763 | |||||||||||||||
| Freestanding Derivatives | ||||||||||||||||||||
| Foreign Currency Contracts | — | 101 | — | — | 101 | |||||||||||||||
| Credit Default Swaps | — | 3,731 | — | — | 3,731 | |||||||||||||||
| Total Return Swaps | — | 526 | — | — | 526 | |||||||||||||||
| Assets of Consolidated CLO Vehicles | ||||||||||||||||||||
| Corporate Loans | — | 10,318,316 | 507,443 | — | 10,825,759 | |||||||||||||||
| Corporate Bonds | — | 690,125 | — | — | 690,125 | |||||||||||||||
| Freestanding Derivatives — Foreign Currency Contracts | — | 23,986 | — | — | 23,986 | |||||||||||||||
| Other | — | — | 458 | — | 458 | |||||||||||||||
| Total Investments of Consolidated Blackstone Funds | 67,443 | 11,726,968 | 1,029,371 | 130,339 | 12,954,121 | |||||||||||||||
| Corporate Treasury Investments | ||||||||||||||||||||
| Equity Securities | 282,866 | — | — | — | 282,866 | |||||||||||||||
| Debt Instruments | — | 1,943,654 | 24,249 | — | 1,967,903 | |||||||||||||||
| Other | — | — | — | 315,274 | 315,274 | |||||||||||||||
| Total Corporate Treasury Investments | 282,866 | 1,943,654 | 24,249 | 315,274 | 2,566,043 | |||||||||||||||
| Other Investments | 193,072 | 14,162 | 95,393 | 19,847 | 322,474 | |||||||||||||||
| Total Investments | 543,381 | 13,684,784 | 1,149,013 | 465,460 | 15,842,638 | |||||||||||||||
| Accounts Receivable — Loans and Receivables | — | — | 239,659 | — | 239,659 | |||||||||||||||
| Other Assets | ||||||||||||||||||||
| Freestanding Derivatives | ||||||||||||||||||||
| Interest Rate Contracts | 575 | 1,467 | — | — | 2,042 | |||||||||||||||
| Foreign Currency Contracts | — | 2,097 | — | — | 2,097 | |||||||||||||||
| Credit Default Swaps | — | 304 | — | — | 304 | |||||||||||||||
| Total Other Assets | 575 | 3,868 | — | — | 4,443 | |||||||||||||||
| $ | 1,397,636 | $ | 13,688,652 | $ | 1,388,672 | $ | 465,460 | $ | 16,940,420 | |||||||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| December 31, 2017 | ||||||||||||||||
| Level I | Level II | Level III | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Loans Payable — Liabilities of Consolidated CLO Vehicles (a) | ||||||||||||||||
| Senior Secured Notes (b) | $ | — | $ | 10,594,656 | $ | — | $ | 10,594,656 | ||||||||
| Subordinated Notes (b) | — | 703,164 | — | 703,164 | ||||||||||||
| Total Loans Payable | — | 11,297,820 | — | 11,297,820 | ||||||||||||
| Due to Affiliates — Liabilities of Consolidated CLO Vehicles (a) | ||||||||||||||||
| Senior Secured Notes (b) | — | 996 | — | 996 | ||||||||||||
| Subordinated Notes (b) | — | 40,390 | — | 40,390 | ||||||||||||
| Total Due to Affiliates | — | 41,386 | — | 41,386 | ||||||||||||
| Securities Sold, Not Yet Purchased | — | 154,380 | — | 154,380 | ||||||||||||
| Accounts Payable, Accrued Expenses and Other Liabilities | ||||||||||||||||
| Liabilities of Consolidated Blackstone Funds — Freestanding Derivatives (a) | ||||||||||||||||
| Foreign Currency Contracts | — | 5,628 | — | 5,628 | ||||||||||||
| Credit Default Swaps | — | 5,163 | — | 5,163 | ||||||||||||
| Total Liabilities of Consolidated Blackstone Funds | — | 10,791 | — | 10,791 | ||||||||||||
| Freestanding Derivatives | ||||||||||||||||
| Interest Rate Contracts | 415 | 26,860 | — | 27,275 | ||||||||||||
| Foreign Currency Contracts | — | 2,975 | — | 2,975 | ||||||||||||
| Credit Default Swaps | — | 304 | — | 304 | ||||||||||||
| Total Freestanding Derivatives | 415 | 30,139 | — | 30,554 | ||||||||||||
| Net Investment Hedges — Foreign Currency Contracts | — | 453 | — | 453 | ||||||||||||
| Total Accounts Payable, Accrued Expenses and Other Liabilities | 415 | 41,383 | — | 41,798 | ||||||||||||
| $ | 415 | $ | 11,534,969 | $ | — | $ | 11,535,384 | |||||||||
| (a) | Pursuant to GAAP consolidation guidance, the Partnership is required to consolidate all VIEs in which it has been identified as the primary beneficiary, including certain CLO vehicles, and other funds in which a consolidated entity of the Partnership, such as the general partner of the fund, has a controlling financial interest. While the Partnership is required to consolidate certain funds, including CLO vehicles, for GAAP purposes, the Partnership has no ability to utilize the assets of these funds and there is no recourse to the Partnership for their liabilities since these are client assets and liabilities. |
|---|
| (b) | Senior and subordinated notes issued by CLO vehicles are classified based on the more observable fair value of CLO assets less (1) the fair value of any beneficial interests held by Blackstone, and (2) the carrying value of any beneficial interests that represent compensation for services. |
|---|
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The following table summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of December 31, 2018:
| Fair Value | Valuation Techniques | Unobservable Inputs | Ranges | Weighted Average (a) | ||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Investments of Consolidated Blackstone Funds | ||||||||||||||||||||
| Equity Securities | $ | 138,725 | Discounted Cash Flows | Discount Rate | 7.1% - 26.1% | 12.6% | ||||||||||||||
| Revenue CAGR | -0.8% - 32.4% | 6.6% | ||||||||||||||||||
| Book Value Multiple | 0.9x - 9.5x | 8.3x | ||||||||||||||||||
| Exit Capitalization Rate | 5.0% - 11.4% | 8.0% | ||||||||||||||||||
| Exit Multiple - EBITDA | 0.1x - 17.5x | 10.3x | ||||||||||||||||||
| Exit Multiple - NOI | 12.8x | N/A | ||||||||||||||||||
| Exit Multiple - P/E | 17.0x | N/A | ||||||||||||||||||
| 21,050 | Market Comparable Companies | Book Value Multiple | 0.8x - 8.0x | 1.3x | ||||||||||||||||
| Dollar/Acre Multiple | $7.0 - $44.1 | $32.9 | ||||||||||||||||||
| 21,492 | Other | N/A | N/A | N/A | ||||||||||||||||
| 20,250 | Transaction Price | N/A | N/A | N/A | ||||||||||||||||
| 49 | Third Party Pricing | N/A | N/A | N/A | ||||||||||||||||
| Partnership and LLC Interests | 295,251 | Discounted Cash Flows | Discount Rate | 4.1% - 26.5% | 9.7% | |||||||||||||||
| Revenue CAGR | -1.1% - 48.4% | 26.9% | ||||||||||||||||||
| Book Value Multiple | 8.5x - 9.3x | 9.2x | ||||||||||||||||||
| Exit Capitalization Rate | 2.9% - 15.0% | 6.3% | ||||||||||||||||||
| Exit Multiple - EBITDA | 0.1x - 15.3x | 10.0x | ||||||||||||||||||
| Exit Multiple - NOI | 13.3x | N/A | ||||||||||||||||||
| 9,444 | Market Comparable Companies | Book Value Multiple | 1.1x | N/A | ||||||||||||||||
| Dollar/Acre Multiple | $5.3 - $12.0 | $7.5 | ||||||||||||||||||
| 9,390 | Other | N/A | N/A | N/A | ||||||||||||||||
| 41,188 | Transaction Price | N/A | N/A | N/A | ||||||||||||||||
| Debt Instruments | 8,342 | Discounted Cash Flows | Discount Rate | 7.0% - 19.3% | 9.8% | |||||||||||||||
| Revenue CAGR | 0.7% | N/A | ||||||||||||||||||
| Exit Multiple - EBITDA | 6.5x | N/A | ||||||||||||||||||
| 120,843 | Third Party Pricing | N/A | N/A | N/A | ||||||||||||||||
| 4,634 | Transaction Price | N/A | N/A | N/A | ||||||||||||||||
| Assets of Consolidated CLO Vehicles | 41 | Discounted Cash Flows | Discount Rate | 5.0% | N/A | |||||||||||||||
| 673,317 | Third Party Pricing | N/A | N/A | N/A | ||||||||||||||||
| Total Investments of Consolidated Blackstone Funds | 1,364,016 |
continued ...
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| Fair Value | Valuation Techniques | Unobservable Inputs | Ranges | Weighted Average (a) | ||||||||
| Corporate Treasury Investments | $ | 7,947 | Discounted Cash Flows | Discount Rate | 4.4% - 7.5% | 6.6% | ||||||
| Default Rate | 2.0% | N/A | ||||||||||
| Pre-payment Rate | 20.0% | N/A | ||||||||||
| Recovery Lag | 12 Months - 21 Months | 13 Months | ||||||||||
| Recovery Rate | 17.5% - 70.0% | 67.7% | ||||||||||
| Reinvestment Rate | LIBOR + 400 bps | N/A | ||||||||||
| 16,621 | Third Party Pricing | N/A | N/A | N/A | ||||||||
| Loans and Receivables | 304,173 | Discounted Cash Flows | Discount Rate | 6.1% - 12.8% | 8.7% | |||||||
| Other Investments | 26,631 | Discounted Cash Flows | Discount Rate | 1.0% - 15.0% | 2.8% | |||||||
| Default Rate | 2.0% | N/A | ||||||||||
| Pre-payment Rate | 20.0% | N/A | ||||||||||
| Recovery Lag | 12 Months | N/A | ||||||||||
| Recovery Rate | 70.0% | N/A | ||||||||||
| Reinvestment Rate | LIBOR + 400 bps | N/A | ||||||||||
| 4,986 | Transaction Price | N/A | N/A | N/A | ||||||||
| $ | 1,724,374 | |||||||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The following table summarizes the quantitative inputs and assumptions used for items categorized in Level III of the fair value hierarchy as of December 31, 2017:
| Fair Value | Valuation Techniques | Unobservable Inputs | Ranges | Weighted- Average (a) | ||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Investments of Consolidated Blackstone Funds | ||||||||||||||||||||
| Equity Securities | $ | 91,753 | Discounted Cash Flows | Discount Rate | 7.1% - 31.4% | 12.6% | ||||||||||||||
| Revenue CAGR | 1.0% - 49.4% | 7.1% | ||||||||||||||||||
| Exit Capitalization Rate | 5.0% - 11.4% | 8.5% | ||||||||||||||||||
| Exit Multiple - EBITDA | 4.0x - 16.0x | 9.9x | ||||||||||||||||||
| Exit Multiple - NOI | 8.8x - 12.5x | 10.5x | ||||||||||||||||||
| Exit Multiple - P/E | 9.5x - 17.0x | 11.0x | ||||||||||||||||||
| 862 | Market Comparable Companies | Book Value Multiple | 0.8x - 0.9x | 0.9x | ||||||||||||||||
| Exit Multiple - EBITDA | 8.0x | N/A | ||||||||||||||||||
| 17,536 | Other | N/A | N/A | N/A | ||||||||||||||||
| 21,716 | Transaction Price | N/A | N/A | N/A | ||||||||||||||||
| Partnership and LLC Interests | 293,744 | Discounted Cash Flows | Discount Rate | 4.6% - 26.5% | 9.8% | |||||||||||||||
| Revenue CAGR | -22.2% - 71.5% | 8.4% | ||||||||||||||||||
| Exit Capitalization Rate | 3.1% - 10.0% | 5.7% | ||||||||||||||||||
| Exit Multiple - EBITDA | 0.1x - 15.0x | 8.6x | ||||||||||||||||||
| Exit Multiple - NOI | 12.5x | N/A | ||||||||||||||||||
| 530 | Market Comparable Companies | Book Value Multiple | 1.0x | N/A | ||||||||||||||||
| 22,346 | Other | N/A | N/A | N/A | ||||||||||||||||
| 758 | Third Party Pricing | N/A | N/A | N/A | ||||||||||||||||
| 14,070 | Transaction Price | N/A | N/A | N/A | ||||||||||||||||
| Debt Instruments | 6,122 | Discounted Cash Flows | Discount Rate | 6.6% - 18.4% | 9.6% | |||||||||||||||
| Revenue CAGR | 7.7% | N/A | ||||||||||||||||||
| Exit Capitalization Rate | 8.3% | N/A | ||||||||||||||||||
| Exit Multiple - NOI | 12.0x | N/A | ||||||||||||||||||
| 50,136 | Third Party Pricing | N/A | N/A | N/A | ||||||||||||||||
| 1,897 | Transaction Price | N/A | N/A | N/A | ||||||||||||||||
| Assets of Consolidated CLO Vehicles | 8,277 | Market Comparable Companies | EBITDA Multiple | 7.0x | N/A | |||||||||||||||
| 499,624 | Third Party Pricing | N/A | N/A | N/A | ||||||||||||||||
| Total Investments of Consolidated Blackstone Funds | 1,029,371 |
continued ...
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| Fair Value | Valuation Techniques | Unobservable Inputs | Ranges | Weighted- Average (a) | ||||||||
| Corporate Treasury Investments | $ | 8,886 | Discounted Cash Flows | Discount Rate | 5.1% - 6.3% | 5.4% | ||||||
| Default Rate | 2.0% | N/A | ||||||||||
| Pre-payment Rate | 20% | N/A | ||||||||||
| Recovery Lag | 12 Months | N/A | ||||||||||
| Recovery Rate | 30.0% - 70.0% | 68.1% | ||||||||||
| Reinvestment Rate | LIBOR + 400 bps | N/A | ||||||||||
| 15,363 | Third Party Pricing | N/A | N/A | N/A | ||||||||
| Loans and Receivables | 239,659 | Discounted Cash Flows | Discount Rate | 7.1% - 10.3% | 8.8% | |||||||
| Other Investments | 65,821 | Discounted Cash Flows | Discount Rate | 0.7% - 13.0% | 2.2% | |||||||
| Default Rate | 2.0% | N/A | ||||||||||
| Pre-payment Rate | 20.0% | N/A | ||||||||||
| Recovery Lag | 12 Months | N/A | ||||||||||
| Recovery Rate | 70.0% | N/A | ||||||||||
| Reinvestment Rate | LIBOR + 400 bps - | LIBOR + 401 | ||||||||||
| LIBOR + 413 bps | bps | |||||||||||
| 29,572 | Transaction Price | N/A | N/A | N/A | ||||||||
| $ | 1,388,672 | |||||||||||
| N/A | Not applicable. | |
| CAGR | Compound annual growth rate. | |
| EBITDA | Earnings before interest, taxes, depreciation and amortization. | |
| Exit Multiple | Ranges include the last twelve months EBITDA, forward EBITDA and price/earnings exit multiples. | |
| NOI | Net operating income. | |
| P/E | Price-earnings ratio. | |
| Third Party Pricing | Third Party Pricing is generally determined on the basis of unadjusted prices between market participants provided by reputable dealers or pricing services. | |
| Transaction Price | Includes recent acquisitions or transactions. | |
| (a) | Unobservable inputs were weighted based on the fair value of the investments included in the range. |
The significant unobservable inputs used in the fair value measurement of corporate treasury investments, debt instruments and other investments as of the reporting date are discount rates, default rates, recovery rates, recovery lag, pre-payment rates and reinvestment rates. Increases (decreases) in any of the discount rates, default rates, recovery lag and pre-payment rates in isolation would have resulted in a lower (higher) fair value measurement. Increases (decreases) in any of the recovery rates and reinvestment rates in isolation would have resulted in a higher (lower) fair value measurement. Generally, a change in the assumption used for default rates may be accompanied by a directionally similar change in the assumption used for recovery lag and a directionally opposite change in the assumption used for recovery rates and pre-payment rates.
The significant unobservable inputs used in the fair value measurement of equity securities, partnership and limited liability company (“LLC”) interests, debt instruments, assets of consolidated CLO vehicles and loans and receivables are discount rates, exit capitalization rates, exit multiples, EBITDA multiples and revenue compound annual growth rates. Increases (decreases) in any of discount rates and exit capitalization rates in isolation could have resulted in a lower (higher) fair value measurement. Increases (decreases) in any of exit multiples and revenue compound annual growth rates in isolation could have resulted in a higher (lower) fair value measurement.
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Since December 31, 2017, there have been no changes in valuation techniques within Level II and Level III that have had a material impact on the valuation of financial instruments.
The following tables summarize the changes in financial assets and liabilities measured at fair value for which the Partnership has used Level III inputs to determine fair value and does not include gains or losses that were reported in Level III in prior years or for instruments that were transferred out of Level III prior to the end of the respective reporting period. Total realized and unrealized gains and losses recorded for Level III investments are reported in either Investment Income (Loss) or Net Gains from Fund Investment Activities in the Consolidated Statements of Operations.
| Level III Financial Assets at Fair Value Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||||||||||
| Investments of Consolidated Funds | Loans and Receivables | Other Investments (a) | Total | Investments of Consolidated Funds | Loans and Receivables | Other Investments (a) | Total | |||||||||||||||||||||||||
| Balance, Beginning of Period | $ | 1,029,371 | $ | 239,659 | $ | 119,642 | $ | 1,388,672 | $ | 685,873 | $ | 211,359 | $ | 130,588 | $ | 1,027,820 | ||||||||||||||||
| Transfer In Due to Consolidation and Acquisition | 50,043 | — | — | 50,043 | 34,651 | — | — | 34,651 | ||||||||||||||||||||||||
| Transfer Out Due to Deconsolidation | (217,182 | ) | — | — | (217,182 | ) | (38,629 | ) | — | — | (38,629 | ) | ||||||||||||||||||||
| Transfer In to Level III (b) | 190,497 | — | 8,484 | 198,981 | 59,473 | — | 27,127 | 86,600 | ||||||||||||||||||||||||
| Transfer Out of Level III (b) | (127,829 | ) | — | (56,534 | ) | (184,363 | ) | (168,986 | ) | — | (22,111 | ) | (191,097 | ) | ||||||||||||||||||
| Purchases | 862,844 | 1,016,838 | 28,041 | 1,907,723 | 869,817 | 856,042 | 25,335 | 1,751,194 | ||||||||||||||||||||||||
| Sales | (457,824 | ) | (953,538 | ) | (43,213 | ) | (1,454,575 | ) | (473,178 | ) | (835,426 | ) | (54,039 | ) | (1,362,643 | ) | ||||||||||||||||
| Settlements | — | (22,285 | ) | (73 | ) | (22,358 | ) | — | (12,584 | ) | (1,573 | ) | (14,157 | ) | ||||||||||||||||||
| Changes in Gains (Losses) Included in Earnings | 34,096 | 23,499 | (162 | ) | 57,433 | 60,350 | 20,268 | 14,315 | 94,933 | |||||||||||||||||||||||
| Balance, End of Period | $ | 1,364,016 | $ | 304,173 | $ | 56,185 | $ | 1,724,374 | $ | 1,029,371 | $ | 239,659 | $ | 119,642 | $ | 1,388,672 | ||||||||||||||||
| Changes in Unrealized Gains (Losses) Included in Earnings Related to Investments Still Held at the Reporting Date | $ | (4,378 | ) | $ | — | $ | 2,439 | $ | (1,939 | ) | $ | 14,083 | $ | 21,482 | $ | (91 | ) | $ | 35,474 | |||||||||||||
| (a) | Represents corporate treasury investments and Other Investments. |
|---|
| (b) | Transfers in and out of Level III financial assets and liabilities were due to changes in the observability of inputs used in the valuation of such assets and liabilities. |
|---|
There were no Level III financial liabilities as of and for the year ended December 31, 2018 and 2017.
| 9. | VARIABLE INTEREST ENTITIES |
|---|
Pursuant to GAAP consolidation guidance, the Partnership consolidates certain VIEs for which it is determined that the Partnership is the primary beneficiary either directly or indirectly, through a consolidated entity or affiliate. VIEs include certain private equity, real estate, credit-focused or funds of hedge funds entities and CLO vehicles. The purpose
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
of such VIEs is to provide strategy specific investment opportunities for investors in exchange for management and performance based fees. The investment strategies of the Blackstone Funds differ by product; however, the fundamental risks of the Blackstone Funds have similar characteristics, including loss of invested capital and loss of management fees and performance based fees. In Blackstone’s role as general partner, collateral manager or investment adviser, it generally considers itself the sponsor of the applicable Blackstone Fund. The Partnership does not provide performance guarantees and has no other financial obligation to provide funding to consolidated VIEs other than its own capital commitments.
The assets of consolidated variable interest entities may only be used to settle obligations of these entities. In addition, there is no recourse to the Partnership for the consolidated VIEs’ liabilities including the liabilities of the consolidated CLO vehicles.
During the twelve months ended December 31, 2018, the Partnership’s ownership interest in certain CLO and other vehicles originated outside of the U.S. was diluted such that the Partnership determined that it was no longer the primary beneficiary of these VIEs and deconsolidated these vehicles. As of the date of deconsolidation, the Partnership’s Total Assets, Total Liabilities and Non-Controlling Interests in Consolidated Entities were reduced by $8.9 billion, $8.7 billion and $196.1 million, respectively. The Partnership will continue to receive management fees and Performance Allocations from these vehicles following the dilution of its ownership interest.
The Partnership holds variable interests in certain VIEs which are not consolidated as it is determined that the Partnership is not the primary beneficiary. The Partnership’s involvement with such entities is in the form of direct equity interests and fee arrangements. The maximum exposure to loss represents the loss of assets recognized by Blackstone relating to non-consolidated VIEs, and any clawback obligation relating to previously distributed Performance Allocations. The Partnership’s maximum exposure to loss relating to non-consolidated VIEs were as follows:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Investments | $ | 942,700 | $ | 805,501 | ||||
| Accounts Receivable | — | 15,760 | ||||||
| Due from Affiliates | 254,744 | 81,465 | ||||||
| Potential Clawback Obligation | 159,691 | 98,331 | ||||||
| Maximum Exposure to Loss | $ | 1,357,135 | $ | 1,001,057 | ||||
| Amounts Due to Non-Consolidated VIEs | $ | 207 | $ | 179 | ||||
| 10. | REPURCHASE AGREEMENTS |
|---|
At December 31, 2018, the Partnership pledged securities with a carrying value of $279.5 million and cash to collateralize its repurchase agreements. Such securities can be repledged, delivered or otherwise used by the counterparty.
At December 31, 2017, the Partnership pledged securities with a carrying value of $169.7 million and cash to collateralize its repurchase agreements. Such securities can be repledged, delivered or otherwise used by the counterparty.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The following tables provide information regarding the Partnership’s Repurchase Agreements obligation by type of collateral pledged:
| December 31, 2018 | ||||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and Continuous | Up to 30 Days | 30 - 90 Days | Greater than 90 days | Total | ||||||||||||||||
| Repurchase Agreements | ||||||||||||||||||||
| Asset-Backed Securities | $ | — | $ | 42,908 | $ | 144,731 | $ | 34,563 | $ | 222,202 | ||||||||||
| Gross Amount of Recognized Liabilities for Repurchase Agreements in Note 12. “Offsetting of Assets and Liabilities” | $ | 222,202 | ||||||||||||||||||
| Amounts Related to Agreements Not Included in Offsetting Disclosure in Note 12. “Offsetting of Assets and Liabilities” | $ | — | ||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||
| Remaining Contractual Maturity of the Agreements | ||||||||||||||||||||
| Overnight and Continuous | Up to 30 Days | 30 - 90 Days | Greater than 90 days | Total | ||||||||||||||||
| Repurchase Agreements | ||||||||||||||||||||
| Asset-Backed Securities | $ | — | $ | 22,756 | $ | 96,084 | $ | — | $ | 118,840 | ||||||||||
| Gross Amount of Recognized Liabilities for Repurchase Agreements in Note 12. “Offsetting of Assets and Liabilities” | $ | 118,840 | ||||||||||||||||||
| Amounts Related to Agreements Not Included in Offsetting Disclosure in Note 12. “Offsetting of Assets and Liabilities” | $ | — | ||||||||||||||||||
| 11. | OTHER ASSETS AND ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES |
|---|
Other Assets consists of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Furniture, Equipment and Leasehold Improvements | $ | 360,571 | $ | 345,875 | ||||
| Less: Accumulated Depreciation | (240,199 | ) | (219,309 | ) | ||||
| Furniture, Equipment and Leasehold Improvements, Net | 120,372 | 126,566 | ||||||
| Prepaid Expenses | 110,732 | 78,723 | ||||||
| Freestanding Derivatives | 44,918 | 4,443 | ||||||
| Other | 18,226 | 32,965 | ||||||
| $ | 294,248 | $ | 242,697 | |||||
Depreciation expense of $23.9 million, $25.2 million and $32.0 million related to furniture, equipment and leasehold improvements for the years ended December 31, 2018, 2017 and 2016, respectively, is included in General, Administrative and Other in the Consolidated Statements of Operations.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Accounts Payable, Accrued Expenses and Other Liabilities includes $15.6 million and $27.2 million as of December 31, 2018 and 2017, respectively, relating to redemptions that were legally payable to investors of the consolidated Blackstone Funds and $311.4 million and $1.5 billion, respectively, of payables relating to unsettled purchases.
| 12. | OFFSETTING OF ASSETS AND LIABILITIES |
|---|
The following tables present the offsetting of assets and liabilities as of December 31, 2018:
| Gross and Net Amounts of Assets Presented in the Statement of Financial Condition | Gross Amounts Not Offset in the Statement of Financial Condition | |||||||||||||||
| Financial Instruments (a) | Cash Collateral Received | Net Amount | ||||||||||||||
| Assets | ||||||||||||||||
| Freestanding Derivatives | $ | 45,416 | $ | 37,788 | $ | 5,547 | $ | 2,081 | ||||||||
| Gross and Net Amounts of Liabilities Presented in the Statement of Financial Condition | Gross Amounts Not Offset in the Statement of Financial Condition | |||||||||||||||
| Financial Instruments (a) | Cash Collateral Pledged | Net Amount | ||||||||||||||
| Liabilities | ||||||||||||||||
| Freestanding Derivatives | $ | 52,844 | $ | 35,905 | $ | 15,377 | $ | 1,562 | ||||||||
| Repurchase Agreements | 222,202 | 222,202 | — | — | ||||||||||||
| $ | 275,046 | $ | 258,107 | $ | 15,377 | $ | 1,562 | |||||||||
| (a) | Amounts presented are inclusive of both legally enforceable master netting agreements, and financial instruments received or pledged as collateral. Financial instruments received or pledged as collateral offset derivative counterparty risk exposure, but do not reduce net balance sheet exposure. |
|---|
The following tables present the offsetting of assets and liabilities as of December 31, 2017:
| Gross and Net Amounts of Assets Presented in the Statement of Financial Condition | Gross Amounts Not Offset in the Statement of Financial Condition | |||||||||||||||
| Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||
| Assets | ||||||||||||||||
| Freestanding Derivatives | $ | 8,801 | $ | 3,279 | $ | — | $ | 5,522 | ||||||||
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| Gross and Net Amounts of Liabilities Presented in the Statement of Financial Condition | Gross Amounts Not Offset in the Statement of Financial Condition | |||||||||||||||
| Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||||
| Liabilities | ||||||||||||||||
| Net Investment Hedges | $ | 453 | $ | — | $ | — | $ | 453 | ||||||||
| Freestanding Derivatives | 36,234 | 3,279 | 32,405 | 550 | ||||||||||||
| Repurchase Agreements | 118,840 | 118,840 | — | — | ||||||||||||
| $ | 155,527 | $ | 122,119 | $ | 32,405 | $ | 1,003 | |||||||||
Repurchase Agreements are presented separately on the Statements of Financial Condition. Freestanding Derivative assets are included in Other Assets in the Statements of Financial Condition. See Note 11. “Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities” for the components of Other Assets.
Freestanding Derivative liabilities are included in Accounts Payable, Accrued Expenses and Other Liabilities in the Consolidated Statements of Financial Condition and are not a significant component thereof.
Notional Pooling Arrangement
Blackstone has a notional cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows for cash withdrawals based upon aggregate cash balances on deposit at the same financial institution. Cash withdrawals cannot exceed aggregate cash balances on deposit. The net balance of cash on deposit and overdrafts is used as a basis for calculating net interest expense or income. As of December 31, 2018, the aggregate cash balance on deposit relating to the cash pooling arrangement was $1.4 billion, which was offset with an accompanying overdraft of $1.4 billion.
| 13. | BORROWINGS |
|---|
On September 21, 2018, Blackstone Holdings Finance Co. L.L.C. (the “Issuer”), an indirect subsidiary of the Partnership, entered into an amended and restated $1.6 billion revolving credit facility (the “Credit Facility”) with Citibank, N.A., as administrative agent, and the lenders party thereto. The amendment and restatement among other things, increased the amount of available borrowings and extended the maturity date from August 31, 2021 to September 21, 2023.
The Partnership borrows and enters into credit agreements for its general operating and investment purposes and certain Blackstone Funds borrow to meet financing needs of their operating and investing activities. Borrowing facilities have been established for the benefit of selected Blackstone Funds. When a Blackstone Fund borrows from the facility in which it participates, the proceeds from the borrowing are strictly limited for its intended use by the
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
borrowing fund and not available for other Partnership purposes. The Partnership’s credit facilities consist of the following:
| December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||
| Credit Available | Borrowing Outstanding | Weighted Average Interest Rate | Credit Available | Borrowing Outstanding | Weighted Average Interest Rate | |||||||||||||||||||
| Revolving Credit Facility (a) | $ | 1,600,000 | $ | — | 0.75 | % | $ | 1,500,000 | $ | 683 | 0.88 | % | ||||||||||||
| Blackstone Issued Senior Notes (b) | ||||||||||||||||||||||||
| 5.875%, Due 3/15/2021 | 400,000 | 400,000 | 5.88 | % | 400,000 | 400,000 | 5.88 | % | ||||||||||||||||
| 4.750%, Due 2/15/2023 | 400,000 | 400,000 | 4.75 | % | 400,000 | 400,000 | 4.75 | % | ||||||||||||||||
| 2.000%, Due 5/19/2025 | 344,010 | 344,010 | 2.00 | % | 360,150 | 360,150 | 2.00 | % | ||||||||||||||||
| 1.000%, Due 10/5/2026 | 688,020 | 688,020 | 1.00 | % | 720,300 | 720,300 | 1.00 | % | ||||||||||||||||
| 3.150%, Due 10/2/2027 | 300,000 | 300,000 | 3.15 | % | 300,000 | 300,000 | 3.15 | % | ||||||||||||||||
| 6.250%, Due 8/15/2042 | 250,000 | 250,000 | 6.25 | % | 250,000 | 250,000 | 6.25 | % | ||||||||||||||||
| 5.000%, Due 6/15/2044 | 500,000 | 500,000 | 5.00 | % | 500,000 | 500,000 | 5.00 | % | ||||||||||||||||
| 4.450%, Due 7/15/2045 | 350,000 | 350,000 | 4.45 | % | 350,000 | 350,000 | 4.45 | % | ||||||||||||||||
| 4.000%, Due 10/2/2047 | 300,000 | 300,000 | 4.00 | % | 300,000 | 300,000 | 4.00 | % | ||||||||||||||||
| 5,132,030 | 3,532,030 | 3.79 | % | 5,080,450 | 3,581,133 | 3.76 | % | |||||||||||||||||
| Blackstone Fund Facilities (c) | — | — | — | 2,803 | 2,803 | 2.79 | % | |||||||||||||||||
| CLO Vehicles (d) | 6,863,285 | 6,863,285 | 4.00 | % | 11,583,607 | 11,583,607 | 2.32 | % | ||||||||||||||||
| $ | 11,995,315 | $ | 10,395,315 | 3.93 | % | $ | 16,666,860 | $ | 15,167,543 | 2.54 | % | |||||||||||||
| (a) | The Issuer has a Credit Facility with Citibank, N.A., as Administrative Agent in the amount of $1.6 billion with a maturity date of September 21, 2023. Interest on the borrowings is based on an adjusted LIBOR rate or alternate base rate, in each case plus a margin, and undrawn commitments bear a commitment fee. The Weighted Average Interest Rate presented here represents the margin above adjusted LIBOR. The margin is subject to change based on Blackstone’s credit rating. Borrowings may also be made in U.K. sterling, euros, Swiss francs, Japanese yen or Canadian dollars, in each case subject to certain sub-limits. The Credit Facility contains customary representations, covenants and events of default. Financial covenants consist of a maximum net leverage ratio and a requirement to keep a minimum amount of fee-earning assets under management, each tested quarterly. The Borrowing Outstanding at each date represent outstanding but undrawn letters of credit against the credit facility. |
|---|
| (b) | The Issuer has issued long term borrowings in the form of senior notes (the “Notes”). The Notes are unsecured and unsubordinated obligations of the Issuer. The Notes are fully and unconditionally guaranteed, jointly and severally, by the Partnership, Blackstone Holdings (the “Guarantors”), and the Issuer. The guarantees are unsecured and unsubordinated obligations of the Guarantors. Transaction costs related to the issuance of the Notes have been deducted from the Note liability and are being amortized over the life of the Notes. The indentures include covenants, including limitations on the Issuer’s and the Guarantors’ ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge, consolidate or sell, transfer or lease assets. The indentures also provide for events of default and further provide that the trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Notes may declare the Notes immediately due and payable upon the occurrence and during the continuance of any event of default after expiration of any applicable grace period. In the case of specified events of bankruptcy, insolvency, receivership or reorganization, the principal amount of the Notes and any accrued and unpaid interest on the Notes automatically become due and payable. All or a portion of the Notes may be redeemed at the Issuer’s option in whole or in part, at any time and from time to time, prior to their |
|---|
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| stated maturity, at the make-whole redemption price set forth in the Notes. If a change of control repurchase event occurs, the holders of the Notes may require the Issuer to repurchase the Notes at a repurchase price in cash equal to 101% of the aggregate principal amount of the Notes repurchased plus any accrued and unpaid interest on the Notes repurchased to, but not including, the date of repurchase. Interest expense on the Notes was $136.7 million, $200.4 million and $145.6 million for the years ended December 31, 2018, 2017 and 2016, respectively. |
|---|
| (c) | Represents borrowing facilities for the various consolidated Blackstone Funds used to meet liquidity and investing needs. Certain borrowings under these facilities were used for bridge financing and general liquidity purposes. Other borrowings were used to finance the purchase of investments with the borrowing remaining in place until the disposition or refinancing event. Such borrowings have varying maturities and are rolled over until the disposition or a refinancing event. Because the timing of such events is unknown and may occur in the near term, these borrowings are considered short-term in nature. Borrowings bear interest at spreads to market rates. Borrowings were secured according to the terms of each facility and are generally secured by the investment purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective fund. Certain facilities have commitment fees. When a fund borrows, the proceeds are available only for use by that fund and are not available for the benefit of other funds. Collateral within each fund is also available only against the borrowings by that fund and not against the borrowings of other funds. |
|---|
| (d) | Represents borrowings due to the holders of debt securities issued by CLO vehicles consolidated by Blackstone. These amounts are included within Loans Payable and Due to Affiliates within the Consolidated Statements of Financial Condition. |
|---|
The following table presents the general characteristics of each of our Notes, as well as their carrying value and fair value. The Notes are included in Loans Payable within the Consolidated Statements of Financial Condition. All of the Notes were issued at a discount. All of the Notes accrue interest from the Issue Date and all pay interest in arrears on a semi-annual basis or annual basis as indicated by the Interest Payment Dates.
| December 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Senior Notes | Carrying Value | Fair Value (a) | Carrying Value | Fair Value (a) | ||||||||||||
| 5.875%, Due 3/15/2021 | $ | 398,947 | $ | 421,720 | $ | 398,514 | $ | 438,320 | ||||||||
| 4.750%, Due 2/15/2023 | 395,166 | 417,600 | 394,137 | 434,200 | ||||||||||||
| 2.000%, Due 5/19/2025 | 339,959 | 352,197 | 355,425 | 385,433 | ||||||||||||
| 1.000%, Due 10/5/2026 | 679,193 | 647,564 | 709,871 | 711,440 | ||||||||||||
| 3.150%, Due 10/2/2027 | 296,717 | 285,030 | 296,399 | 295,320 | ||||||||||||
| 6.250%, Due 8/15/2042 | 238,221 | 289,225 | 238,019 | 328,200 | ||||||||||||
| 5.000%, Due 6/15/2044 | 488,747 | 490,150 | 488,536 | 574,100 | ||||||||||||
| 4.450%, Due 7/15/2045 | 344,038 | 329,770 | 343,925 | 372,575 | ||||||||||||
| 4.000%, Due 10/2/2047 | 290,163 | 262,800 | 289,989 | 296,940 | ||||||||||||
| $ | 3,471,151 | $ | 3,496,056 | $ | 3,514,815 | $ | 3,836,528 | |||||||||
| (a) | Fair value is determined by broker quote and these notes would be classified as Level II within the fair value hierarchy. |
|---|
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Included within Loans Payable and Due to Affiliates within the Consolidated Statements of Financial Condition are amounts due to holders of debt securities issued by Blackstone’s consolidated CLO vehicles. Borrowings through the consolidated CLO vehicles consisted of the following:
| December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||
| Borrowing Outstanding | Weighted Average Interest Rate | Weighted Average Remaining Maturity in Years | Borrowing Outstanding | Weighted Average Interest Rate | Weighted Average Remaining Maturity in Years | |||||||||||||||||||
| Senior Secured Notes | $ | 6,531,550 | 4.20 | % | 7.5 | $ | 10,689,240 | 2.35 | % | 4.1 | ||||||||||||||
| Subordinated Notes | 331,735 | (a | ) | N/A | 894,367 | (a | ) | N/A | ||||||||||||||||
| $ | 6,863,285 | $ | 11,583,607 | |||||||||||||||||||||
| (a) | The Subordinated Notes do not have contractual interest rates but instead receive distributions from the excess cash flows of the CLO vehicles. |
|---|
Senior Secured Notes and Subordinated Notes comprise the following amounts:
| December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||
| Amounts Due to Non- Consolidated Affiliates | Amounts Due to Non- Consolidated Affiliates | |||||||||||||||||||||||
| Fair Value | Borrowing Outstanding | Fair Value | Fair Value | Borrowing Outstanding | Fair Value | |||||||||||||||||||
| Senior Secured Notes | $ | 6,476,434 | $ | 3,250 | $ | 3,201 | $ | 10,595,652 | $ | 1,000 | $ | 996 | ||||||||||||
| Subordinated Notes | 60,289 | 111,659 | 52,811 | 743,554 | 53,400 | 40,390 | ||||||||||||||||||
| $ | 6,536,723 | $ | 114,909 | $ | 56,012 | $ | 11,339,206 | $ | 54,400 | $ | 41,386 | |||||||||||||
The Loans Payable of the consolidated CLO vehicles are collateralized by assets held by each respective CLO vehicle and assets of one vehicle may not be used to satisfy the liabilities of another. This collateral consisted of Cash, Corporate Loans, Corporate Bonds and other securities. As of December 31, 2018 and 2017, the fair value of the consolidated CLO assets was $7.1 billion and $13.4 billion, respectively.
As part of Blackstone’s borrowing arrangements, the Partnership is subject to certain financial and operating covenants. The Partnership was in compliance with all of its loan covenants as of December 31, 2018.
Scheduled principal payments for borrowings at December 31, 2018 are as follows:
| Operating Borrowings | Blackstone Fund Facilities / CLO Vehicles | Total Borrowings | ||||||||||
| 2019 | $ | — | $ | — | $ | — | ||||||
| 2020 | — | — | — | |||||||||
| 2021 | 400,000 | — | 400,000 | |||||||||
| 2022 | — | — | — | |||||||||
| 2023 | 400,000 | — | 400,000 | |||||||||
| Thereafter | 2,732,030 | 6,863,285 | 9,595,315 | |||||||||
| $ | 3,532,030 | $ | 6,863,285 | $ | 10,395,315 | |||||||
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| 14. | INCOME TAXES |
|---|
The Income Before Provision for Taxes consists of the following:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Income Before Provision for Taxes | ||||||||||||
| U.S. Domestic Income | $ | 3,308,202 | $ | 3,956,339 | $ | 2,214,974 | ||||||
| Foreign Income | 204,739 | 161,750 | 166,630 | |||||||||
| $ | 3,512,941 | $ | 4,118,089 | $ | 2,381,604 | |||||||
The Provision for Taxes consists of the following:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Current | ||||||||||||
| Federal Income Tax | $ | 73,525 | $ | 31,457 | $ | 32,383 | ||||||
| Foreign Income Tax | 42,128 | 36,083 | 17,322 | |||||||||
| State and Local Income Tax | 53,961 | 40,507 | 32,572 | |||||||||
| 169,614 | 108,047 | 82,277 | ||||||||||
| Deferred | ||||||||||||
| Federal Income Tax | 59,924 | 613,518 | 42,042 | |||||||||
| Foreign Income Tax | (2,518 | ) | (34 | ) | 363 | |||||||
| State and Local Income Tax | 22,370 | 21,616 | 7,680 | |||||||||
| 79,776 | 635,100 | 50,085 | ||||||||||
| Provision for Taxes | $ | 249,390 | $ | 743,147 | $ | 132,362 | ||||||
The following table summarizes Blackstone’s tax position:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Income Before Provision for Taxes | $ | 3,512,941 | $ | 4,118,089 | $ | 2,381,604 | ||||||
| Provision for Taxes | $ | 249,390 | $ | 743,147 | $ | 132,362 | ||||||
| Effective Income Tax Rate | 7.1 | % | 18.0 | % | 5.6 | % |
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
The following table reconciles the effective income tax rate to the U.S. federal statutory tax rate:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Statutory U.S. Federal Income Tax Rate | 21.0 | % | 35.0 | % | 35.0 | % | ||||||
| Income Passed Through to Common Unitholders and Non-Controlling Interest Holders (a) | -15.5 | % | -25.9 | % | -28.6 | % | ||||||
| State and Local Income Taxes | 1.8 | % | 1.5 | % | 1.3 | % | ||||||
| Equity-Based Compensation | — | -0.1 | % | -0.2 | % | |||||||
| Impact of the Tax Reform Bill | — | 8.3 | % | — | ||||||||
| Other | -0.2 | % | -0.8 | % | -1.9 | % | ||||||
| Effective Income Tax Rate | 7.1 | % | 18.0 | % | 5.6 | % | ||||||
| (a) | Includes income that is not taxable to the Partnership and its subsidiaries. Such income is directly taxable to the Partnership’s unitholders and the non-controlling interest holders. |
|---|
U.S. federal income tax reform legislation, known as the Tax Cuts and Jobs Act, was signed into law on December 22, 2017 (the “Tax Reform Bill”). In December 2017 the SEC staff issued guidance on accounting for the tax effects of the Tax Reform Bill, which provided that the income tax effects of those aspects of the Tax Reform Bill for which the Partnership’s accounting for income taxes was complete must be reflected in that current period. The Tax Reform Bill reduced the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Consequently, the Partnership recorded a decrease related to the net deferred tax assets of $500.6 million with a corresponding net adjustment to deferred income tax expense of $500.6 million for the year ended December 31, 2017. The remeasurement was partially offset by a $160.3 million tax benefit resulting from the $403.9 million reduction to the liability under the Tax Receivable Agreement resulting from the reduction of the federal income tax rate. The net impact to the 2017 effective tax rate was an 8.3% increase. During the quarter ended December 31, 2018 the Partnership completed its accounting for the income tax effects for the Tax Reform Bill, and no significant adjustments were made to the provisional amounts previously recorded.
Further, the Tax Reform Bill includes a one-time deemed repatriation on undistributed foreign earnings and profits (referred to as the transition tax), which was not material to the Partnership.
The Tax Reform Bill also established new tax laws that became effective with the tax year beginning January 1, 2018, including, but not limited to, a new provision designed to tax global intangible low-taxed income, a tax determined by base erosion and anti-tax abuse tax benefits from certain payments between a U.S. corporation and foreign subsidiaries and interest expense limitation. The net effect on the 2018 provision for income taxes for these provisions are immaterial.
Deferred income taxes reflect the net tax effects of temporary differences that may exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences is as follows:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Deferred Tax Assets | ||||||||
| Fund Management Fees | $ | 6,955 | $ | 9,938 | ||||
| Equity-Based Compensation | 69,484 | 54,699 | ||||||
| Amortization and Depreciation | 768,984 | 754,924 | ||||||
| Net Operating Loss Carry Forward | — | 8,885 | ||||||
| Total Deferred Tax Assets | 845,423 | 828,446 | ||||||
| Deferred Tax Liabilities | ||||||||
| Unrealized Gains from Investments | 71,472 | 65,883 | ||||||
| Other | 34,469 | 36,593 | ||||||
| Total Deferred Tax Liabilities | 105,941 | 102,476 | ||||||
| Net Deferred Tax Assets | $ | 739,482 | $ | 725,970 | ||||
Future realization of tax benefits depends on the expectation of taxable income within a period of time that the tax benefits will reverse. The Partnership has recorded a significant deferred tax asset for the future amortization of tax basis intangibles acquired from the predecessor owners and current owners. The amortization period for these tax basis intangibles is 15 years; accordingly, the related deferred tax assets will reverse over the same period. The Partnership had a taxable loss of $43.2 million and $10.3 million for the years ended December 31, 2015 and 2016, respectively, of which $10.3 million was carried back and utilized against taxable income generated in the tax year ended December 31, 2014. $43.2 million together with the taxable loss of $18.6 million generated for the year ended December 31, 2017 were fully realized in the tax year ended December 31, 2018. The Partnership has no taxable loss carryforward as of December 31, 2018. The Partnership has considered the 15 year amortization period for the tax basis intangibles in evaluating whether it should establish a valuation allowance.
In evaluating its ability to utilize deferred tax assets, the Partnership considers projections of taxable income, beginning with historic results and incorporating assumptions of the amount of future pretax operating income. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates that the Partnership uses to manage its business. At this time, the Partnership’s projections of future taxable income indicate that it is more likely than not that the benefits from the deferred tax asset will be realized. Therefore, the Partnership has determined that no valuation allowance is needed at December 31, 2018.
Currently, the Partnership does not believe it meets the indefinite reversal criteria that would cause the Partnership to not recognize a deferred tax liability with respect to its foreign subsidiaries. Where applicable, Blackstone will record a deferred tax liability for any outside basis difference of an investment in a foreign subsidiary.
Blackstone files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, Blackstone is subject to examination by federal and certain state, local and foreign tax regulators. As of December 31, 2018, Blackstone’s U.S. federal income tax returns for the years 2015 through 2017 are open under the normal three-year statute of limitations and therefore subject to examination. State and local tax returns are generally subject to audit from 2014 through 2017. The City of New York is examining certain other subsidiaries’ tax returns for the years 2007 through 2014. The Income Tax Department of the Government of India
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
is examining the tax returns of the Indian subsidiaries for the years 2008 and 2009. HM Revenue and Customs in the U.K. is examining certain U.K. subsidiaries’ tax returns for 2011. Blackstone believes that during 2019 certain tax examinations have a reasonable possibility of being completed and does not expect the results of these examinations to have a material impact on the consolidated financial statements.
Blackstone’s unrecognized tax benefits, excluding related interest and penalties, were:
| December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Unrecognized Tax Benefits — January 1 | $ | 11,454 | $ | 3,581 | $ | 15,698 | ||||||
| Additions based on Tax Positions Related to Current Year | — | — | 902 | |||||||||
| Reductions for Tax Positions of Current Year | — | — | (851 | ) | ||||||||
| Additions for Tax Positions of Prior Years | 9,671 | 11,167 | — | |||||||||
| Reductions for Tax Positions of Prior Years | (323 | ) | (1,860 | ) | (7,837 | ) | ||||||
| Reductions for Tax Positions as a Result of a Lapse of the Applicable Statute of Limitations | — | — | (3,774 | ) | ||||||||
| Settlements | — | (1,382 | ) | (357 | ) | |||||||
| Exchange Rate Fluctuations | 62 | (52 | ) | (200 | ) | |||||||
| Unrecognized Tax Benefits — December 31 | $ | 20,864 | $ | 11,454 | $ | 3,581 | ||||||
If the above tax benefits were recognized, $20.9 million and $11.5 million for the years ended December 31, 2018 and 2017, respectively, would reduce the annual effective rate. Blackstone does not believe that it will have a material increase or decrease in its unrecognized tax benefits during the coming year.
The unrecognized tax benefits are recorded in Accounts Payable, Accrued Expense and Other Liabilities in the Consolidated Statements of Financial Condition.
Blackstone recognizes interest and penalties accrued related to unrecognized tax positions in General, Administrative and Other Expenses. During the years ended December 31, 2018, 2017 and 2016, $1.8 million, $(0.4) million and $(4.1) million of interest expense were accrued (reversed), respectively. During the years ended December 31, 2018, 2017 and 2016, no penalties were accrued.
Other Income — Reduction of the Tax Receivable Agreement Liability
In 2017, the $403.9 million Reduction of the Tax Receivable Agreement Liability was primarily attributable to the reduction in the corporate federal tax rate from 35% to 21% pursuant to the Tax Reform Bill.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| 15. | NET INCOME PER COMMON UNIT |
|---|
Basic and diluted net income per common unit for the years ended December 31, 2018, 2017 and 2016 was calculated as follows:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Net Income for Per Common Unit Calculations | ||||||||||||
| Net Income Attributable to The Blackstone Group L.P., Basic | $ | 1,541,788 | $ | 1,471,374 | $ | 1,039,014 | ||||||
| Incremental Net Income from Assumed Exchange of Blackstone Holdings Partnership Units | 1,185,799 | — | 828,102 | |||||||||
| Net Income Attributable to The Blackstone Group L.P., Diluted | $ | 2,727,587 | $ | 1,471,374 | $ | 1,867,116 | ||||||
| Units Outstanding | ||||||||||||
| Weighted-Average Common Units Outstanding, Basic | 678,850,245 | 665,453,198 | 649,475,264 | |||||||||
| Weighted-Average Unvested Deferred Restricted Common Units | 226,487 | 793,648 | 1,445,277 | |||||||||
| Weighted-Average Blackstone Holdings Partnership Units | 527,886,114 | — | 544,194,049 | |||||||||
| Weighted-Average Common Units Outstanding, Diluted | 1,206,962,846 | 666,246,846 | 1,195,114,590 | |||||||||
| Net Income Per Common Unit, Basic | $ | 2.27 | $ | 2.21 | $ | 1.60 | ||||||
| Net Income Per Common Unit, Diluted | $ | 2.26 | $ | 2.21 | $ | 1.56 | ||||||
| Distributions Declared Per Common Unit (a) | $ | 2.42 | $ | 2.32 | $ | 1.66 | ||||||
| (a) | Distributions declared reflects the calendar date of the declaration for each distribution. The fourth quarter distribution, if any, for any fiscal year will be declared and paid in the subsequent fiscal year. |
|---|
In computing the dilutive effect that the exchange of Blackstone Holdings Partnership Units would have on net income per common unit, the Partnership considered that net income available to holders of common units would increase due to the elimination of non-controlling interests in Blackstone Holdings, inclusive of any tax impact. Because the hypothetical conversion may result in a different tax rate, the Blackstone Holdings Partnership Units are considered anti-dilutive in certain periods and dilutive in other periods.
The following table summarizes the anti-dilutive securities for the periods indicated:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Weighted-Average Blackstone Holdings Partnership Units | — | 533,982,613 | — |
Unit Repurchase Program
On April 16, 2018, the Board of Directors of our general partner, Blackstone Group Management L.L.C., authorized the repurchase of up to $1.0 billion of Blackstone common units and Blackstone Holdings Partnership
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Units. Under the unit repurchase program, units may be repurchased from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual number of units repurchased will depend on a variety of factors, including legal requirements, price and economic and market conditions. The unit repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.
During the years ended December 31, 2017 and 2016, no units were repurchased. During the year ended December 31, 2018, Blackstone repurchased 16.0 million Blackstone common units at a total cost of $541.5 million. As of December 31, 2018, the amount remaining available for repurchases under this program was $458.5 million.
| 16. | EQUITY-BASED COMPENSATION |
|---|
The Partnership has granted equity-based compensation awards to Blackstone’s senior managing directors, non-partner professionals, non-professionals and selected external advisers under the Partnership’s 2007 Equity Incentive Plan (the “Equity Plan”). The Equity Plan allows for the granting of options, unit appreciation rights or other unit-based awards (units, restricted units, restricted common units, deferred restricted common units, phantom restricted common units or other unit-based awards based in whole or in part on the fair value of the Blackstone common units or Blackstone Holdings Partnership Units) which may contain certain service or performance requirements. As of January 1, 2018, the Partnership had the ability to grant 172,155,134 units under the Equity Plan.
For the years ended December 31, 2018, 2017 and 2016 the Partnership recorded compensation expense of $366.9 million, $338.7 million, and $323.7 million, respectively, in relation to its equity-based awards with corresponding tax benefits of $59.0 million, $47.1 million, and $33.8 million, respectively.
As of December 31, 2018, there was $846.5 million of estimated unrecognized compensation expense related to unvested awards. This cost is expected to be recognized over a weighted-average period of 3.8 years.
Total vested and unvested outstanding units, including Blackstone common units, Blackstone Holdings Partnership Units and deferred restricted common units, were 1,196,679,968 as of December 31, 2018. Total outstanding unvested phantom units were 49,155 as of December 31, 2018.
A summary of the status of the Partnership’s unvested equity-based awards as of December 31, 2018 and of changes during the period January 1, 2018 through December 31, 2018 is presented below:
| Blackstone Holdings | The Blackstone Group L.P. | |||||||||||||||||||||||
| Equity Settled Awards | Cash Settled Awards | |||||||||||||||||||||||
| Unvested Units | Partnership Units | Weighted- Average Grant Date Fair Value | Deferred Restricted Common Units | Weighted- Average Grant Date Fair Value | Phantom Units | Weighted- Average Grant Date Fair Value | ||||||||||||||||||
| Balance, December 31, 2017 | 30,023,189 | $ | 35.26 | 9,019,974 | $ | 30.03 | 44,196 | $ | 31.85 | |||||||||||||||
| Granted | 13,011,587 | 32.80 | 5,234,541 | 32.61 | 9,408 | 36.87 | ||||||||||||||||||
| Vested | (9,350,183 | ) | 34.35 | (4,538,236 | ) | 30.02 | (6,796 | ) | 35.98 | |||||||||||||||
| Forfeited | (2,130,466 | ) | 37.15 | (404,011 | ) | 30.85 | — | — | ||||||||||||||||
| Balance, December 31, 2018 | 31,554,127 | $ | 34.38 | 9,312,268 | $ | 31.43 | 46,808 | $ | 34.66 | |||||||||||||||
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Units Expected to Vest
The following unvested units, after expected forfeitures, as of December 31, 2018, are expected to vest:
| Units | Weighted-Average Service Period in Years | |||||||
| Blackstone Holdings Partnership Units | 27,284,548 | 3.5 | ||||||
| Deferred Restricted Blackstone Common Units | 8,034,354 | 2.2 | ||||||
| Total Equity-Based Awards | 35,318,902 | 3.2 | ||||||
| Phantom Units | 38,474 | 2.5 | ||||||
Deferred Restricted Common Units and Phantom Units
The Partnership has granted deferred restricted common units to certain senior and non-senior managing director professionals, analysts and senior finance and administrative personnel and selected external advisers and phantom units (cash settled equity-based awards) to other senior and non-senior managing director employees. Holders of deferred restricted common units and phantom units are not entitled to any voting rights. Only phantom units are to be settled in cash.
The fair values of deferred restricted common units have been derived based on the closing price of Blackstone’s common units on the date of the grant, multiplied by the number of unvested awards and expensed over the assumed service period, which ranges from 1 to 5 years. Additionally, the calculation of the compensation expense assumes forfeiture rates based upon historical turnover rates, ranging from 1.0% to 12.5% annually by employee class, and a per unit discount, ranging from $0.50 to $10.88.
The phantom units vest over the assumed service period, which ranges from 1 to 5 years. On each such vesting date, Blackstone delivered or will deliver cash to the holder in an amount equal to the number of phantom units held multiplied by the then fair market value of the Blackstone common units on such date. Additionally, the calculation of the compensation expense assumes a forfeiture rate based upon a historical turnover rate of 9.2% annually by employee class. Blackstone is accounting for these cash settled awards as a liability.
Blackstone paid $0.2 million, $0.3 million and $0.2 million to non-senior managing director employees in settlement of phantom units for the years ended December 31, 2018, 2017 and 2016, respectively.
Blackstone Holdings Partnership Units
The Partnership has granted deferred restricted Blackstone Holdings Partners Units to certain newly hired and pre-existing senior managing directors. Holders of deferred restricted Blackstone Holdings Partnership Units are not entitled to any voting rights.
The fair values of deferred restricted Blackstone Holdings Partnership Units have been derived based on the closing price of Blackstone’s common units on the date of the grant, multiplied by the number of unvested awards and expensed over the assumed service period, which ranges from 1 to 7 years. Additionally, the calculation of the compensation expense assumes forfeiture rates ranging from 6.6% to 9.2%, based on historical experience.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| 17. | RELATED PARTY TRANSACTIONS |
|---|
Affiliate Receivables and Payables
Due from Affiliates and Due to Affiliates consisted of the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Due from Affiliates | ||||||||
| Management Fees, Performance Revenues, Reimbursable Expenses and other receivables from Non-Consolidated Entities and Portfolio Companies | $ | 1,520,100 | $ | 1,616,148 | ||||
| Due From Certain Non-Controlling Interest Holders and Blackstone Employees | 462,475 | 410,877 | ||||||
| Accrual for Potential Clawback of Previously Distributed Performance Allocations | 11,548 | 1,112 | ||||||
| $ | 1,994,123 | $ | 2,028,137 | |||||
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Due to Affiliates | ||||||||
| Due to Certain Non-Controlling Interest Holders in Connection with the Tax Receivable Agreements | $ | 796,902 | $ | 715,734 | ||||
| Due to Non-Consolidated Entities | 99,728 | 90,038 | ||||||
| Due to Note-Holders of Consolidated CLO Vehicles | 56,012 | 41,386 | ||||||
| Due to Certain Non-Controlling Interest Holders and Blackstone Employees | 53,613 | 87,829 | ||||||
| Accrual for Potential Repayment of Previously Received Performance Allocations | 29,521 | 2,171 | ||||||
| $ | 1,035,776 | $ | 937,158 | |||||
Interests of the Founder, Senior Managing Directors, Employees and Other Related Parties
The Founder, senior managing directors, employees and certain other related parties invest on a discretionary basis in the consolidated Blackstone Funds both directly and through consolidated entities. These investments generally are subject to preferential management fee and performance allocation or incentive fee arrangements. As of December 31, 2018 and 2017, such investments aggregated $842.9 million and $813.2 million, respectively. Their share of the Net Income Attributable to Redeemable Non-Controlling and Non-Controlling Interests in Consolidated Entities aggregated $63.6 million, $113.9 million and $79.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Loans to Affiliates
Loans to affiliates consist of interest bearing advances to certain Blackstone individuals to finance their investments in certain Blackstone Funds. These loans earn interest at Blackstone’s cost of borrowing and such interest totaled $5.4 million, $3.4 million and $1.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Contingent Repayment Guarantee
Blackstone and its personnel who have received Performance Allocation distributions have guaranteed payment on a several basis (subject to a cap) to the carry funds of any clawback obligation with respect to the excess Performance Allocation allocated to the general partners of such funds and indirectly received thereby to the extent that either Blackstone or its personnel fails to fulfill its clawback obligation, if any. The Accrual for Potential Repayment of Previously Received Performance Allocations represents amounts previously paid to Blackstone Holdings and non-controlling interest holders that would need to be repaid to the Blackstone Funds if the carry funds were to be liquidated based on the fair value of their underlying investments as of December 31, 2018. See Note 18. “Commitments and Contingencies — Contingencies — Contingent Obligations (Clawback)”.
Aircraft and Other Services
In the normal course of business, Blackstone personnel make use of aircraft owned as personal assets by Stephen A. Schwarzman; an aircraft owned jointly as a personal asset by Hamilton E. James, Blackstone’s Executive Vice Chairman and a Director of Blackstone, and another senior managing director; an aircraft owned as a personal asset by Jonathan D. Gray, Blackstone’s President and Chief Operating Officer and a Director of Blackstone; and an aircraft owned jointly as a personal asset by Bennett J. Goodman, Co-Founder of GSO Capital and a Director of Blackstone, and a former senior managing director (each such aircraft, “Personal Aircraft”). Mr. Schwarzman paid for his purchases of his Personal Aircraft himself. Mr. James paid for his interest in his jointly owned Personal Aircraft. Mr. Goodman paid for his interest in his jointly owned Personal Aircraft. Mr. Gray paid for his purchase of his Personal Aircraft himself. Mr. Schwarzman, Mr. James, Mr. Goodman and Mr. Gray respectively bear operating, personnel and maintenance costs associated with the operation of such Personal Aircraft. Payment by Blackstone for the use of the Personal Aircraft by Blackstone employees is made based on market rates.
In addition, on occasion, certain of Blackstone’s executive officers and employee directors and their families may make personal use of aircraft in which Blackstone owns a fractional interest, as well as other assets of Blackstone. Any such personal use of Blackstone assets is charged to the executive officer or employee director based on market rates and usage. Personal use of Blackstone resources is also reimbursed to Blackstone based on market rates.
The transactions described herein are not material to the Consolidated Financial Statements.
Tax Receivable Agreements
Blackstone used a portion of the proceeds from the IPO and the sale of non-voting common units to Beijing Wonderful Investments to purchase interests in the predecessor businesses from the predecessor owners. In addition, holders of Blackstone Holdings Partnership Units may exchange their Blackstone Holdings Partnership Units for Blackstone common units on a one-for-one basis. The purchase and subsequent exchanges are expected to result in increases in the tax basis of the tangible and intangible assets of Blackstone Holdings and therefore reduce the amount of tax that Blackstone’s wholly owned subsidiaries would otherwise be required to pay in the future.
One of the subsidiaries of the Partnership which is a corporate taxpayer has entered into tax receivable agreements with each of the predecessor owners and additional tax receivable agreements have been executed, and will continue to be executed, with newly-admitted senior managing directors and others who acquire Blackstone Holdings Partnership Units. The agreements provide for the payment by the corporate taxpayer to such owners of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the corporate taxpayers
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
actually realize as a result of the aforementioned increases in tax basis and of certain other tax benefits related to entering into these tax receivable agreements. For purposes of the tax receivable agreements, cash savings in income tax will be computed by comparing the actual income tax liability of the corporate taxpayers to the amount of such taxes that the corporate taxpayers would have been required to pay had there been no increase to the tax basis of the tangible and intangible assets of Blackstone Holdings as a result of the exchanges and had the corporate taxpayers not entered into the tax receivable agreements.
As a result of the Tax Reform Bill, there was a reduction of $403.9 million of the tax receivable agreement liability due to the pre-IPO owners and others mentioned above. Assuming no future material changes in the relevant tax law and that the corporate taxpayers earn sufficient taxable income to realize the full tax benefit of the increased amortization of the assets, the expected future payments under the tax receivable agreements (which are taxable to the recipients) will aggregate $796.9 million over the next 15 years. The after-tax net present value of these estimated payments totals $309.2 million assuming a 15% discount rate and using Blackstone’s most recent projections relating to the estimated timing of the benefit to be received. Future payments under the tax receivable agreements in respect of subsequent exchanges would be in addition to these amounts. The payments under the tax receivable agreements are not conditioned upon continued ownership of Blackstone equity interests by the pre-IPO owners and the others mentioned above. Subsequent to December 31, 2018, payments totaling $87.3 million were made to certain pre-IPO owners and others mentioned above in accordance with the tax receivable agreement and related to tax benefits the Partnership received for the 2016 and 2017 taxable years.
Amounts related to the deferred tax asset resulting from the increase in tax basis from the exchange of Blackstone Holdings Partnership Units to Blackstone common units, the resulting remeasurement of net deferred tax assets at the Blackstone ownership percentage at the balance sheet date, the due to affiliates for the future payments resulting from the tax receivable agreements and resulting adjustment to partners’ capital are included as Acquisition of Ownership Interests from Non-Controlling Interest Holders in the Supplemental Disclosure of Non-Cash Investing and Financing Activities in the Consolidated Statements of Cash Flows.
Other
Blackstone does business with and on behalf of some of its Portfolio Companies; all such arrangements are on a negotiated basis.
Additionally, please see Note 18. “Commitments and Contingencies — Contingencies — Guarantees” for information regarding guarantees provided to a lending institution for certain loans held by employees.
| 18. | COMMITMENTS AND CONTINGENCIES |
|---|
Commitments
Operating Leases
The Partnership enters into non-cancelable lease and sublease agreements primarily for office space, which expire on various dates through 2030. Occupancy lease agreements, in addition to base rentals, generally are subject to escalation provisions based on certain costs incurred by the landlord, and are recognized on a straight-line basis over the term of the lease agreement. Rent expense includes base contractual rent and variable costs such as building expenses, utilities, taxes and insurance. Rent expense for the years ended December 31, 2018, 2017 and 2016, was $109.9 million, $104.7 million and $97.2 million, respectively. At December 31, 2018 and 2017, the Partnership maintained irrevocable standby letters of credit and cash deposits as security for the leases of $7.9 million and
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
$8.9 million, respectively. As of December 31, 2018, the aggregate minimum future payments, net of sublease income, required on the operating leases are as follows:
| 2019 | $ | 78,506 | ||
| 2020 | 72,191 | |||
| 2021 | 80,914 | |||
| 2022 | 79,094 | |||
| 2023 | 77,248 | |||
| Thereafter | 273,347 | |||
| Total | $ | 661,300 | ||
Investment Commitments
Blackstone had $2.6 billion of investment commitments as of December 31, 2018 representing general partner capital funding commitments to the Blackstone Funds, limited partner capital funding to other funds and Blackstone principal investment commitments. The consolidated Blackstone Funds had signed investment commitments of $94.5 million as of December 31, 2018 which includes $24.9 million of signed investment commitments for portfolio company acquisitions in the process of closing.
Regulated Entities
Certain U.S. and non-U.S. entities are subject to various investment adviser and other financial regulatory rules and requirements that may include minimum net capital requirements. These entities have continuously operated in excess of these requirements. This includes a number of U.S. entities that are registered as investment advisers with the SEC.
These regulatory capital requirements may restrict the Partnership’s ability to withdraw capital from its entities. At December 31, 2018, $39.4 million of net assets of consolidated entities may be restricted as to the payment of cash dividends and advances to the Partnership.
Contingencies
Guarantees
Certain of Blackstone’s consolidated real estate funds guarantee payments to third parties in connection with the on-going business activities and/or acquisitions of their Portfolio Companies. There is no direct recourse to the Partnership to fulfill such obligations. To the extent that underlying funds are required to fulfill guarantee obligations, the Partnership’s invested capital in such funds is at risk. Total investments at risk in respect of guarantees extended by consolidated real estate funds was $31.3 million as of December 31, 2018.
The Blackstone Holdings Partnerships provided guarantees to a lending institution for certain loans held by employees either for investment in Blackstone Funds or for members’ capital contributions to Blackstone Group International Partners LLP. The amount guaranteed as of December 31, 2018 was $198.3 million.
Litigation
Blackstone may from time to time be involved in litigation and claims incidental to the conduct of its business. Blackstone’s businesses are also subject to extensive regulation, which may result in regulatory proceedings against the Partnership.
Blackstone accrues a liability for legal proceedings only when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. Although there can be no assurance of the outcome of such legal actions, based on information known by
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
management, Blackstone does not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially affect its results of operations, financial position or cash flows.
In December 2017, a purported derivative suit (Mayberry v. KKR & Co., L.P., et al.) was filed in the Commonwealth of Kentucky Franklin County Circuit Court on behalf of the Kentucky Retirement System (“KRS”) by eight of its members and beneficiaries alleging various breaches of fiduciary duty and other violations of Kentucky state law in connection with KRS’s investment in three hedge funds of funds, including a fund managed by Blackstone Alternative Asset Management L.P. (“BAAM L.P.”). The suit names more than 30 defendants, including The Blackstone Group L.P.; BAAM L.P.; Stephen A. Schwarzman, as Chairman and CEO of Blackstone; and J. Tomilson Hill, as then-President and CEO of the Hedge Fund Solutions Group, Vice Chairman of Blackstone and CEO of BAAM (collectively, the “Blackstone Defendants”). Aside from the Blackstone Defendants, the action also names current and former KRS trustees and former KRS officers and various other service providers to KRS and their related persons.
The plaintiffs filed an amended complaint in January 2018. In November 2018, the Circuit Court granted one defendant’s motion to dismiss and denied all other defendants’ motions to dismiss, including those of the Blackstone Defendants. In January 2019, certain of the KRS trustee and officer defendants noticed appeals from the denial of the motions to dismiss to the Kentucky Court of Appeals, and also filed a motion to stay the Mayberry proceedings in Circuit Court pending the outcome of those appeals. In addition, several defendants, including Blackstone and BAAM L.P., filed petitions in the Kentucky Court of Appeals for a writ of prohibition against the ongoing Mayberry proceedings on the ground that the plaintiffs lack standing.
Blackstone believes that this suit is totally without merit and intends to defend it vigorously.
Contingent Obligations (Clawback)
Performance Allocations are subject to clawback to the extent that the Performance Allocations received to date with respect to a fund exceeds the amount due to Blackstone based on cumulative results of that fund. The actual clawback liability, however, generally does not become realized until the end of a fund’s life except for certain Blackstone real estate funds, multi-asset class investment funds and credit-focused funds, which may have an interim clawback liability. The lives of the carry funds, including available contemplated extensions, for which a liability for potential clawback obligations has been recorded for financial reporting purposes, are currently anticipated to expire at various points through 2028. Further extensions of such terms may be implemented under given circumstances.
For financial reporting purposes, when applicable, the general partners record a liability for potential clawback obligations to the limited partners of some of the carry funds due to changes in the unrealized value of a fund’s remaining investments and where the fund’s general partner has previously received Performance Allocation distributions with respect to such fund’s realized investments.
The following table presents the clawback obligations by segment:
| December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||||||
| Segment | Blackstone Holdings | Current and Former Personnel (a) | Total | Blackstone Holdings | Current and Former Personnel | Total | ||||||||||||||||||
| Real Estate | $ | 15,770 | $ | 10,053 | $ | 25,823 | $ | — | $ | — | $ | — | ||||||||||||
| Private Equity | 13,296 | (12,448 | ) | 848 | — | — | — | |||||||||||||||||
| Credit | 1,355 | 1,495 | 2,850 | 1,059 | 1,112 | 2,171 | ||||||||||||||||||
| $ | 30,421 | $ | (900 | ) | $ | 29,521 | $ | 1,059 | $ | 1,112 | $ | 2,171 | ||||||||||||
| (a) | The split of clawback between Blackstone Holdings and Current and Former Personnel is based on the performance of individual investments held by a fund rather than on a fund by fund basis. |
|---|
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
For Private Equity, Real Estate, and certain Credit Funds, a portion of the Performance Allocations paid to current and former Blackstone personnel is held in segregated accounts in the event of a cash clawback obligation. These segregated accounts are not included in the Consolidated Financial Statements of the Partnership, except to the extent a portion of the assets held in the segregated accounts may be allocated to a consolidated Blackstone fund of hedge funds. At December 31, 2018, $675.3 million was held in segregated accounts for the purpose of meeting any clawback obligations of current and former personnel if such payments are required.
In the Credit segment, payment of Performance Allocations to the Partnership by the majority of the stressed/distressed, mezzanine and credit alpha strategies funds are substantially deferred under the terms of the partnership agreements. This deferral mitigates the need to hold funds in segregated accounts in the event of a cash clawback obligation.
If, at December 31, 2018, all of the investments held by our carry funds were deemed worthless, a possibility that management views as remote, the amount of Performance Allocations subject to potential clawback would be $7.0 billion, on an after tax basis where applicable, of which Blackstone Holdings is potentially liable for $6.4 billion if current and former Blackstone personnel default on their share of the liability, a possibility that management also views as remote.
| 19. | SEGMENT REPORTING |
|---|
Blackstone transacts its primary business in the United States and substantially all of its revenues are generated domestically.
Blackstone conducts its alternative asset management businesses through four segments:
| • | Real Estate — Blackstone’s Real Estate segment primarily comprises its management of global, Europe and Asia-focused opportunistic real estate funds, high yield real estate debt funds, liquid real estate debt funds, core+ real estate funds, a NYSE-listed REIT and a non-exchange traded REIT. |
|---|
| • | Private Equity — Blackstone’s Private Equity segment primarily comprises its management of flagship corporate private equity funds, sector and geographically-focused corporate private equity funds, including energy and Asia-focused funds, a core private equity fund, an opportunistic investment platform, a secondary fund of funds business, infrastructure-focused funds, a life sciences private investment platform, a multi-asset investment program for eligible high net worth investors and a capital markets services business. |
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| • | Hedge Fund Solutions — The largest component of Blackstone’s Hedge Fund Solutions segment is Blackstone Alternative Asset Management, which manages a broad range of commingled and customized hedge fund of fund solutions. The segment also includes investment platforms that seed new hedge fund businesses, purchase minority ownership interests in more established hedge funds, invest in special situation opportunities, create alternative solutions in the form of mutual funds and UCITS and trade directly. |
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| • | Credit — Blackstone’s Credit segment consists principally of GSO Capital Partners LP, which is organized into performing credit strategies (which include mezzanine lending funds, middle market direct lending funds and other performing credit strategy funds), distressed strategies (which include credit alpha strategies, stressed/distressed funds and energy strategies) and long only strategies (which consist of CLOs, closed end funds, open end funds and separately managed accounts). In addition, the segment includes a publicly traded master limited partnership investment platform, Harvest, and our insurer-focused platform, Blackstone Insurance Solutions. |
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Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
These business segments are differentiated by their various investment strategies. The Real Estate, Private Equity, Hedge Fund Solutions and Credit segments primarily earn their income from management fees and investment returns on assets under management.
Effective as of and for the three months ended December 31, 2018, Blackstone senior management determined that Segment Distributable Earnings, and not Economic Income, is the measure that it uses to assess the performance of its business segments. Segment Distributable Earnings is used by management to make operating decisions, allocate resources and determine the compensation of employees across all of its business segments. All prior periods have been recast to reflect these updates.
Segment Distributable Earnings is Blackstone’s segment profitability measure used to make operating decisions and assess performance across Blackstone’s four segments. Blackstone’s segments are presented on a basis that deconsolidates Blackstone Funds, eliminates non-controlling ownership interests in Blackstone’s consolidated Operating Partnerships, removes the amortization of intangible assets and removes Transaction-Related Charges. Transaction-Related Charges arise from corporate actions including acquisitions, divestitures and Blackstone’s initial public offering. They consist primarily of equity-based compensation charges, gains and losses on contingent consideration arrangements, changes in the balance of the tax receivable agreement resulting from a change in tax law or similar event, transaction costs and any gains or losses associated with these corporate actions.
For segment reporting purposes, Distributable Earnings is presented along with its major components, Fee Related Earnings and Net Realizations. Fee Related Earnings is used to assess Blackstone’s ability to generate profits from revenues that are measured and received on a recurring basis and not subject to future realization events. Net Realizations is the sum of Realized Principal Investment Income and Realized Performance Revenues less Realized Performance Compensation. Performance Allocations and Incentive Fees are presented together and referred to collectively as Performance Revenues or Performance Compensation.
Segment Presentation
The following tables present the financial data for Blackstone’s four segments as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016.
| December 31, 2018 and the Twelve Months Then Ended | ||||||||||||||||||||
| Real Estate | Private Equity | Hedge Fund Solutions | Credit | Total Segments | ||||||||||||||||
| Management and Advisory Fees, Net | ||||||||||||||||||||
| Base Management Fees | $ | 985,399 | $ | 785,223 | $ | 519,782 | $ | 553,921 | $ | 2,844,325 | ||||||||||
| Transaction, Advisory and Other Fees, Net | 152,513 | 58,165 | 3,180 | 15,640 | 229,498 | |||||||||||||||
| Management Fee Offsets | (11,442 | ) | (13,504 | ) | (93 | ) | (12,332 | ) | (37,371 | ) | ||||||||||
| Total Management and Advisory Fees, Net | 1,126,470 | 829,884 | 522,869 | 557,229 | 3,036,452 | |||||||||||||||
| Fee Related Performance Revenues | 124,502 | — | — | (666 | ) | 123,836 | ||||||||||||||
| Fee Related Compensation | (459,430 | ) | (375,446 | ) | (162,172 | ) | (219,098 | ) | (1,216,146 | ) | ||||||||||
| Other Operating Expenses | (146,260 | ) | (133,096 | ) | (77,772 | ) | (131,200 | ) | (488,328 | ) | ||||||||||
| Fee Related Earnings | 645,282 | 321,342 | 282,925 | 206,265 | 1,455,814 | |||||||||||||||
| Realized Performance Revenues | 914,984 | 757,406 | 42,419 | 96,962 | 1,811,771 | |||||||||||||||
| Realized Performance Compensation | (284,319 | ) | (318,167 | ) | (21,792 | ) | (53,863 | ) | (678,141 | ) | ||||||||||
| Realized Principal Investment Income | 92,525 | 109,731 | 17,039 | 16,763 | 236,058 | |||||||||||||||
| Total Net Realizations | 723,190 | 548,970 | 37,666 | 59,862 | 1,369,688 | |||||||||||||||
| Total Segment Distributable Earnings | $ | 1,368,472 | $ | 870,312 | $ | 320,591 | $ | 266,127 | $ | 2,825,502 | ||||||||||
| Segment Assets | $ | 7,521,117 | $ | 7,548,544 | $ | 1,976,809 | $ | 3,592,356 | $ | 20,638,826 | ||||||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| December 31, 2017 and the Twelve Months Then Ended | ||||||||||||||||||||
| Real Estate | Private Equity | Hedge Fund Solutions | Credit | Total Segments | ||||||||||||||||
| Management and Advisory Fees, Net | ||||||||||||||||||||
| Base Management Fees | $ | 872,191 | $ | 724,818 | $ | 516,048 | $ | 567,334 | $ | 2,680,391 | ||||||||||
| Transaction, Advisory and Other Fees, Net | 82,781 | 57,624 | 2,980 | 13,431 | 156,816 | |||||||||||||||
| Management Fee Offsets | (15,934 | ) | (18,007 | ) | (93 | ) | (32,382 | ) | (66,416 | ) | ||||||||||
| Total Management and Advisory Fees, Net | 939,038 | 764,435 | 518,935 | 548,383 | 2,770,791 | |||||||||||||||
| Fee Related Performance Revenues | 79,500 | — | — | 89,945 | 169,445 | |||||||||||||||
| Fee Related Compensation | (437,311 | ) | (347,562 | ) | (146,924 | ) | (253,842 | ) | (1,185,639 | ) | ||||||||||
| Other Operating Expenses | (136,042 | ) | (120,997 | ) | (68,265 | ) | (99,562 | ) | (424,866 | ) | ||||||||||
| Fee Related Earnings | 445,185 | 295,876 | 303,746 | 284,924 | 1,329,731 | |||||||||||||||
| Realized Performance Revenues | 2,141,374 | 1,157,188 | 154,343 | 194,902 | 3,647,807 | |||||||||||||||
| Realized Performance Compensation | (751,526 | ) | (404,544 | ) | (40,707 | ) | (100,834 | ) | (1,297,611 | ) | ||||||||||
| Realized Principal Investment Income | 255,903 | 154,837 | 9,074 | 16,380 | 436,194 | |||||||||||||||
| Total Net Realizations | 1,645,751 | 907,481 | 122,710 | 110,448 | 2,786,390 | |||||||||||||||
| Total Segment Distributable Earnings | $ | 2,090,936 | $ | 1,203,357 | $ | 426,456 | $ | 395,372 | $ | 4,116,121 | ||||||||||
| Segment Assets | $ | 7,585,002 | $ | 6,369,491 | $ | 2,107,441 | $ | 3,926,286 | $ | 19,988,220 | ||||||||||
| Twelve Months Ended December 31, 2016 | ||||||||||||||||||||
| Real Estate | Private Equity | Hedge Fund Solutions | Credit | Total Segments | ||||||||||||||||
| Management and Advisory Fees, Net | ||||||||||||||||||||
| Base Management Fees | $ | 795,161 | $ | 555,593 | $ | 521,736 | $ | 525,289 | $ | 2,397,779 | ||||||||||
| Transaction, Advisory and Other Fees, Net | 95,324 | 39,283 | 1,061 | 9,190 | 144,858 | |||||||||||||||
| Management Fee Offsets | (7,322 | ) | (34,810 | ) | — | (37,512 | ) | (79,644 | ) | |||||||||||
| Total Management and Advisory Fees, Net | 883,163 | 560,066 | 522,797 | 496,967 | 2,462,993 | |||||||||||||||
| Fee Related Performance Revenues | 18,178 | — | — | 83,252 | 101,430 | |||||||||||||||
| Fee Related Compensation | (379,331 | ) | (298,149 | ) | (153,645 | ) | (223,313 | ) | (1,054,438 | ) | ||||||||||
| Other Operating Expenses | (137,581 | ) | (130,685 | ) | (75,870 | ) | (87,700 | ) | (431,836 | ) | ||||||||||
| Fee Related Earnings | 384,429 | 131,232 | 293,282 | 269,206 | 1,078,149 | |||||||||||||||
| Realized Performance Revenues | 1,214,931 | 245,268 | 42,177 | 43,210 | 1,545,586 | |||||||||||||||
| Realized Performance Compensation | (335,147 | ) | (110,882 | ) | (15,029 | ) | (22,199 | ) | (483,257 | ) | ||||||||||
| Realized Principal Investment Income (Loss) | 122,712 | 73,377 | (7,224 | ) | 11,004 | 199,869 | ||||||||||||||
| Total Net Realizations | 1,002,496 | 207,763 | 19,924 | 32,015 | 1,262,198 | |||||||||||||||
| Total Segment Distributable Earnings | $ | 1,386,925 | $ | 338,995 | $ | 313,206 | $ | 301,221 | $ | 2,340,347 | ||||||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
Reconciliations of Total Segment Amounts
The following tables reconcile the Total Segment Revenues, Expenses and Distributable Earnings to their equivalent GAAP measure for the years ended December 31, 2018, 2017 and 2016 along with Total Assets as of December 31, 2018 and 2017:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Revenues | ||||||||||||
| Total GAAP Revenues | $ | 6,833,259 | $ | 7,145,015 | $ | 5,146,299 | ||||||
| Less: Unrealized Performance Allocations (a) | (561,163 | ) | 105,432 | (530,120 | ) | |||||||
| Less: Unrealized Principal Investment (Income) Loss (b) | 65,851 | 131,206 | (20,421 | ) | ||||||||
| Less: Interest and Dividend Revenue (c) | (181,763 | ) | (142,920 | ) | (96,399 | ) | ||||||
| Less: Other Revenue (d) | (89,468 | ) | 140,051 | (54,712 | ) | |||||||
| Impact of Consolidation (e) | (277,406 | ) | (322,729 | ) | (117,965 | ) | ||||||
| Amortization of Intangibles (f) | 1,548 | 1,548 | 1,548 | |||||||||
| Transaction-Related Charges (g) | (588,710 | ) | (40,153 | ) | (20,635 | ) | ||||||
| Intersegment Eliminations | 5,969 | 6,787 | 2,283 | |||||||||
| Total Segment Revenue (h) | $ | 5,208,117 | $ | 7,024,237 | $ | 4,309,878 | ||||||
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Expenses | ||||||||||||
| Total GAAP Expenses | $ | 3,512,040 | $ | 3,752,378 | $ | 2,949,445 | ||||||
| Less: Unrealized Performance Allocations Compensation (i) | (319,742 | ) | (103,794 | ) | (333,528 | ) | ||||||
| Less: Equity Based Compensation (j) | (158,220 | ) | (107,110 | ) | (79,571 | ) | ||||||
| Less: Interest Expense (k) | (159,838 | ) | (192,838 | ) | (148,022 | ) | ||||||
| Impact of Consolidation (e) | (112,354 | ) | (133,081 | ) | (52,586 | ) | ||||||
| Amortization of Intangibles (f) | (58,446 | ) | (46,749 | ) | (82,918 | ) | ||||||
| Transaction-Related Charges (g) | (326,794 | ) | (267,477 | ) | (285,572 | ) | ||||||
| Intersegment Eliminations | 5,969 | 6,787 | 2,283 | |||||||||
| Total Segment Expenses (l) | $ | 2,382,615 | $ | 2,908,116 | $ | 1,969,531 | ||||||
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Other Income | ||||||||||||
| Total GAAP Other Income | $ | 191,722 | $ | 725,452 | $ | 184,750 | ||||||
| Impact of Consolidation (e) | (191,722 | ) | (321,597 | ) | (184,750 | ) | ||||||
| Transaction-Related Charges (g) | — | (403,855 | ) | — | ||||||||
| Total Segment Other Income | $ | — | $ | — | $ | — | ||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Income Before Provision for Taxes | ||||||||||||
| Total GAAP Income Before Provision for Taxes | $ | 3,512,941 | $ | 4,118,089 | $ | 2,381,604 | ||||||
| Less: Unrealized Performance Allocations (a) | (561,163 | ) | 105,432 | (530,120 | ) | |||||||
| Less: Unrealized Principal Investment (Income) Loss (b) | 65,851 | 131,206 | (20,421 | ) | ||||||||
| Less: Interest and Dividend Revenue (c) | (181,763 | ) | (142,920 | ) | (96,399 | ) | ||||||
| Less: Other Revenue (d) | (89,468 | ) | 140,051 | (54,712 | ) | |||||||
| Plus: Unrealized Performance Allocations Compensation (i) | 319,742 | 103,794 | 333,528 | |||||||||
| Plus: Equity Based Compensation (j) | 158,220 | 107,110 | 79,571 | |||||||||
| Plus: Interest Expense (k) | 159,838 | 192,838 | 148,022 | |||||||||
| Impact of Consolidation (e) | (356,774 | ) | (511,245 | ) | (250,129 | ) | ||||||
| Amortization of Intangibles (f) | 59,994 | 48,297 | 84,466 | |||||||||
| Transaction-Related Charges (g) | (261,916 | ) | (176,531 | ) | 264,937 | |||||||
| Total Segment Distributable Earnings | $ | 2,825,502 | $ | 4,116,121 | $ | 2,340,347 | ||||||
| Year Ended December 31, | ||||||||
| 2018 | 2017 | |||||||
| Total Assets | ||||||||
| Total GAAP Assets | $ | 28,924,650 | $ | 34,415,919 | ||||
| Impact of Consolidation (e) | (8,285,824 | ) | (14,427,699 | ) | ||||
| Total Segment Assets | $ | 20,638,826 | $ | 19,988,220 | ||||
Segment basis presents revenues and expenses on a basis that deconsolidates the investment funds Blackstone manages and excludes the amortization of intangibles and Transaction-Related Charges.
| (a) | This adjustment removes Unrealized Performance Revenues on a segment basis. |
|---|
| (b) | This adjustment removes Unrealized Principal Investment Income (Loss) on a segment basis. |
|---|
| (c) | This adjustment removes Interest and Dividend Revenue on a segment basis. |
|---|
| (d) | This adjustment removes Other Revenue on a segment basis. |
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| (e) | The Impact of Consolidation adjustment represents the effect of consolidating Blackstone Funds, the elimination of Blackstone’s interest in these funds, the increase to revenue representing the reimbursement of certain expenses by Blackstone Funds, which are presented gross under GAAP but netted against Other Operating Expenses in the segment presentation, and the removal of amounts associated with the ownership of Blackstone consolidated operating partnerships held by non-controlling interests. |
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| (f) | Amortization of intangibles consists of the amortization of transaction-related intangibles including intangibles associated with Blackstone’s investment in Pátria, which is accounted for under the equity method. |
|---|
| (g) | Transaction-Related Charges arise from corporate actions including acquisitions, divestitures, and Blackstone’s initial public offering. They consist primarily of equity-based compensation charges, gains and losses on contingent consideration arrangements, changes in the balance of the tax receivable agreement resulting from a change in tax law or similar event, transaction costs and any gains or losses associated with these corporate actions. For the year ended December 31, 2018, Transaction-Related Charges included $580.9 million of Other Revenues received upon the conclusion of Blackstone’s investment sub-advisory relationship with FS Investments’ funds. |
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Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| (h) | Total Segment Revenues is comprised of the following: |
|---|
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Total Segment Management and Advisory Fees, Net | $ | 3,036,452 | $ | 2,770,791 | $ | 2,462,993 | ||||||
| Total Segment Fee Related Performance Revenues | 123,836 | 169,445 | 101,430 | |||||||||
| Total Segment Realized Performance Revenues | 1,811,771 | 3,647,807 | 1,545,586 | |||||||||
| Total Segment Realized Principal Investment Income | 236,058 | 436,194 | 199,869 | |||||||||
| Total Segment Revenues | $ | 5,208,117 | $ | 7,024,237 | $ | 4,309,878 | ||||||
| (i) | This adjustment removes Unrealized Performance Allocations Compensation. |
|---|
| (j) | This adjustment removes Equity-Based Compensation on a segment basis. |
|---|
| (k) | This adjustment removes Interest Expense, excluding interest expense related to the Tax Receivable Agreement. |
|---|
| (l) | Total Segment Expenses is comprised of the following: |
|---|
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Total Segment Fee Related Compensation | $ | 1,216,146 | $ | 1,185,639 | $ | 1,054,438 | ||||||
| Total Segment Realized Performance Compensation | 678,141 | 1,297,611 | 483,257 | |||||||||
| Total Segment Other Operating Expenses | 488,328 | 424,866 | 431,836 | |||||||||
| Total Segment Expenses | $ | 2,382,615 | $ | 2,908,116 | $ | 1,969,531 | ||||||
Reconciliations of Total Segment Components
The following tables reconcile the components of Total Segments to their equivalent GAAP measures, reported on the Consolidated Statement of Operations for the years ended December 31, 2018, 2017 and 2016:
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Management and Advisory Fees, Net | ||||||||||||
| GAAP | $ | 3,027,796 | $ | 2,751,322 | $ | 2,464,290 | ||||||
| Segment Adjustment (a) | 8,656 | 19,469 | (1,297 | ) | ||||||||
| Total Segment | $ | 3,036,452 | $ | 2,770,791 | $ | 2,462,993 | ||||||
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| GAAP Realized Performance Revenues to Total Segment Fee Related Performance Revenues | ||||||||||||
| GAAP | ||||||||||||
| Incentive Fees | $ | 57,540 | $ | 242,514 | $ | 149,928 | ||||||
| Investment Income — Realized Performance Allocations | 1,876,507 | 3,571,811 | 1,495,439 | |||||||||
| GAAP | 1,934,047 | 3,814,325 | 1,645,367 | |||||||||
| Total Segment | ||||||||||||
| Less: Realized Performance Revenues | (1,811,771 | ) | (3,647,807 | ) | (1,545,586 | ) | ||||||
| Segment Adjustment (b) | 1,560 | 2,927 | 1,649 | |||||||||
| Total Segment | $ | 123,836 | $ | 169,445 | $ | 101,430 | ||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| GAAP Compensation to Total Segment Fee Related Compensation | ||||||||||||
| GAAP | ||||||||||||
| Compensation | $ | 1,609,957 | $ | 1,442,485 | $ | 1,335,408 | ||||||
| Incentive Fee Compensation | 33,916 | 105,279 | 68,921 | |||||||||
| Realized Performance Allocations Compensation | 711,076 | 1,281,965 | 465,129 | |||||||||
| GAAP | 2,354,949 | 2,829,729 | 1,869,458 | |||||||||
| Total Segment | ||||||||||||
| Less: Realized Performance Compensation | (678,141 | ) | (1,297,611 | ) | (483,257 | ) | ||||||
| Less: Equity-Based Compensation | (158,220 | ) | (107,110 | ) | (79,571 | ) | ||||||
| Segment Adjustment (c) | (302,442 | ) | (239,369 | ) | (252,192 | ) | ||||||
| Total Segment | $ | 1,216,146 | $ | 1,185,639 | $ | 1,054,438 | ||||||
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| GAAP General, Administrative and Other to Total Segment Other Operating Expenses | ||||||||||||
| GAAP | $ | 594,873 | $ | 488,582 | $ | 541,624 | ||||||
| Segment Adjustment (d) | (106,545 | ) | (63,716 | ) | (109,788 | ) | ||||||
| Total Segment | $ | 488,328 | $ | 424,866 | $ | 431,836 | ||||||
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Realized Performance Revenues | ||||||||||||
| GAAP | ||||||||||||
| Incentive Fees | $ | 57,540 | $ | 242,514 | $ | 149,928 | ||||||
| Investment Income — Realized Performance Allocations | 1,876,507 | 3,571,811 | 1,495,439 | |||||||||
| GAAP | 1,934,047 | 3,814,325 | 1,645,367 | |||||||||
| Total Segment | ||||||||||||
| Less: Fee Related Performance Revenues | (123,836 | ) | (169,445 | ) | (101,430 | ) | ||||||
| Segment Adjustment (b) | 1,560 | 2,927 | 1,649 | |||||||||
| Total Segment | $ | 1,811,771 | $ | 3,647,807 | $ | 1,545,586 | ||||||
Table of Contents
THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Realized Performance Compensation | ||||||||||||
| GAAP | ||||||||||||
| Incentive Fee Compensation | $ | 33,916 | $ | 105,279 | $ | 68,921 | ||||||
| Realized Performance Allocations Compensation | 711,076 | 1,281,965 | 465,129 | |||||||||
| GAAP | 744,992 | 1,387,244 | 534,050 | |||||||||
| Total Segment | ||||||||||||
| Less: Fee Related Performance Compensation | (53,844 | ) | (75,933 | ) | (44,969 | ) | ||||||
| Less: Equity-based compensation — Performance Compensation Related | (13,007 | ) | (13,700 | ) | (5,824 | ) | ||||||
| Total Segment | $ | 678,141 | $ | 1,297,611 | $ | 483,257 | ||||||
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Realized Principal Investment Income | ||||||||||||
| GAAP | $ | 415,862 | $ | 635,769 | $ | 278,737 | ||||||
| Segment Adjustment (e) | (179,804 | ) | (199,575 | ) | (78,868 | ) | ||||||
| Total Segment | $ | 236,058 | $ | 436,194 | $ | 199,869 | ||||||
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| GAAP Interest and Dividend Revenue net of Interest Expense to Total Segment Net Interest Income | ||||||||||||
| GAAP | ||||||||||||
| Interest and Dividend Revenue | $ | 171,947 | $ | 139,696 | $ | 95,724 | ||||||
| Interest Expense | (163,990 | ) | (197,486 | ) | (152,654 | ) | ||||||
| GAAP | 7,957 | (57,790 | ) | (56,930 | ) | |||||||
| Segment Adjustment (f) | 13,968 | 7,872 | 5,307 | |||||||||
| Total Segment | $ | 21,925 | $ | (49,918 | ) | $ | (51,623 | ) | ||||
Segment basis presents revenues and expenses on a basis that deconsolidates the investment funds Blackstone manages and excludes the amortization of intangibles, the expense of equity-based awards and Transaction-Related Charges.
| (a) | Represents (1) the add back of net management fees earned from consolidated Blackstone Funds which have been eliminated in consolidation, and (2) the removal of revenue from the reimbursement of certain expenses by the Blackstone Funds, which are presented gross under GAAP but netted against Other Operating Expenses in the Total Segment measures. |
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| (b) | Represents the add back of Performance Revenues earned from consolidated Blackstone Funds which have been eliminated in consolidation. |
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| (c) | Represents the removal of Transaction-Related Charges that are not recorded in the Total Segment measures. |
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| (d) | Represents the removal of (1) the amortization of transaction-related intangibles, and (2) certain expenses reimbursed by the Blackstone Funds, which are presented gross under GAAP but netted against Other Operating Expenses in the Total Segment measures. |
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| (e) | Represents (1) the add back of Principal Investment Income, including general partner income, earned from consolidated Blackstone Funds which have been eliminated in consolidation, and (2) the removal of amounts associated with the ownership of Blackstone consolidated operating partnerships held by non-controlling interests. |
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| (f) | Represents (1) the add back of Other Revenues earned from consolidated Blackstone Funds which have been eliminated in consolidation, and (2) the removal of interest expense associated with the Tax Receivable Agreement. |
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| 20. | SUBSEQUENT EVENTS |
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There have been no events since December 31, 2018 that require recognition or disclosure in the Consolidated Financial Statements.
| 21. | QUARTERLY FINANCIAL DATA (UNAUDITED) |
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| Three Months Ended | ||||||||||||||||
| March 31, 2018 (a) | June 30, 2018 (b) | September 30, 2018 | December 31, 2018 | |||||||||||||
| Revenues | $ | 1,769,131 | $ | 2,632,570 | $ | 1,926,580 | $ | 504,978 | ||||||||
| Expenses | 982,931 | 1,016,381 | 1,017,632 | 495,096 | ||||||||||||
| Other Income (Loss) | 110,599 | 73,519 | 66,838 | (59,234 | ) | |||||||||||
| Income (Loss) Before Provision for Taxes | $ | 896,799 | $ | 1,689,708 | $ | 975,786 | $ | (49,352 | ) | |||||||
| Net Income (Loss) | $ | 842,304 | $ | 1,550,977 | $ | 948,988 | $ | (78,718 | ) | |||||||
| Net Income (Loss) Attributable to The Blackstone Group L.P. | $ | 367,872 | $ | 742,042 | $ | 442,742 | $ | (10,868 | ) | |||||||
| Net Income (Loss) Per Common Unit | ||||||||||||||||
| Common Units, Basic | $ | 0.55 | $ | 1.09 | $ | 0.65 | $ | (0.02 | ) | |||||||
| Common Units, Diluted | $ | 0.53 | $ | 1.09 | $ | 0.64 | $ | (0.02 | ) | |||||||
| Distributions Declared (c) | $ | 0.85 | $ | 0.35 | $ | 0.58 | $ | 0.64 | ||||||||
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THE BLACKSTONE GROUP L.P.
Notes to Consolidated Financial Statements—Continued
(All Dollars Are in Thousands, Except Unit and Per Unit Data, Except Where Noted)
| Three Months Ended | ||||||||||||||||
| March 31, 2017 | June 30, 2017 | September 30, 2017 | December 31, 2017 (d) | |||||||||||||
| Revenues | $ | 1,914,718 | $ | 1,535,726 | $ | 1,735,358 | $ | 1,959,213 | ||||||||
| Expenses | 921,773 | 881,193 | 904,511 | 1,044,901 | ||||||||||||
| Other Income | 66,132 | 110,054 | 63,448 | 485,818 | ||||||||||||
| Income Before Provision for Taxes | $ | 1,059,077 | $ | 764,587 | $ | 894,295 | $ | 1,400,130 | ||||||||
| Net Income | $ | 1,001,640 | $ | 734,979 | $ | 834,783 | $ | 803,540 | ||||||||
| Net Income Attributable to The Blackstone Group L.P. | $ | 451,909 | $ | 337,407 | $ | 377,920 | $ | 304,138 | ||||||||
| Net Income Per Common Unit | ||||||||||||||||
| Common Units, Basic | $ | 0.68 | $ | 0.51 | $ | 0.57 | $ | 0.45 | ||||||||
| Common Units, Diluted | $ | 0.68 | $ | 0.50 | $ | 0.55 | $ | 0.45 | ||||||||
| Distributions Declared (c) | $ | 0.47 | $ | 0.87 | $ | 0.54 | $ | 0.44 | ||||||||
| (a) | Effective January 1, 2018, Blackstone adopted new GAAP guidance on revenue recognition and implemented a change in accounting principal related to carried interest and incentive allocations, which are now accounted for under the GAAP guidance for equity method investments and are presented within Investment Income in the Consolidated Statements of Operations. All historical results presented have been recast to reflect these changes. A complete description of the changes can be found in Note 2. “Summary of Significant Accounting Policies — Recent Accounting Developments” |
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| (b) | For the three months ended June 30, 2018, Revenues included $580.9 million of Transaction-Related Charges recorded in Other Revenues received upon the conclusion of Blackstone’s investment sub-advisory relationship with FS Investments’ funds. |
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| (c) | Distributions declared reflects the calendar date of the declaration of each distribution. |
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| (d) | The Tax Reform Bill enacted in the three months ended December 31, 2017 resulted in a reduction to the liability under the Tax Receivable Agreement of $403.9 million which is included in Other Income and a decrease in the deferred tax assets of $500.6 million which is a component of the Provision for Taxes. See Note 14. “Income Taxes”. |
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Table of Contents
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